Affordability of the National Flood Insurance Program:
Application to Charleston County, South Carolina
Wendy Zhao
The Wharton School
University of Pennsylvania
Howard Kunreuther
The Wharton School
University of Pennsylvania
Jeffrey Czajkowski
The Wharton School
University of Pennsylvania
Forthcoming in Natural Hazards Review
July 20 2015
Working Paper # 2015-03
_____________________________________________________________________
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Affordability of the National Flood Insurance Program:
Application to Charleston County, South Carolina
Wendy Zhao, Howard Kunreuther and Jeffrey Czajkowski*
The Wharton School, University of Pennsylvania
July 2015
Abstract: In March 2014, Congress passed legislation delaying the phasing-in of premium increases on
discounted flood insurance policies that had been authorized in July 2012 by the Biggert-Waters Flood
Insurance Reform Act. This reversal highlights the tension between the realization of risk-based premiums
and affordability of flood insurance for homeowners in flood-prone areas. This study on Charleston County,
South Carolina, seeks to understand how the tension can be resolved using a voucher program coupled with
required mitigation. It specifically focuses on home elevation as the mitigation method. We demonstrate
a potential average increase of 108 to 159 percent for high-risk single-family properties in Special Flood
Hazard Areas in Charleston moving from a current discounted premium to a full risk-based premium as
proposed by the 2012 legislation. Implementation of the proposed voucher program coupled with required
mitigation can reduce government expenditures by more than half over a program that does not require
mitigation if the costs of elevating homes are around $25,000 and insurance policies are located in high
hazard flood zones. In the coastal flood zones, cost savings are achievable even when the cost to elevate
the house is as much as $75,000. However, we also find several conditions under which mitigation does
not lead to reductions in the voucher cost, such as when the policyholder’s household income is below
$10,000 or when elevation cost is unusually high.
* Wendy Zhao, Wharton School at the University of Pennsylvania (wndzhao@gmail.com); Howard Kunreuther,
Wharton School at the University of Pennsylvania (kunreuth@wharton.upenn.edu); Jeffrey Czajkowski, Wharton
School at the University of Pennsylvania (jczaj@wharton.upenn.edu). We thank Carol Heller for editorial assistance
and the reviewers for helpful comments on restructuring the paper. Funding for this research comes from the National
Science Foundation (SES-1061882 and SES-1062039); the Center for Climate and Energy Decision Making through
a cooperative agreement between the National Science Foundation and Carnegie Mellon University (SES-0949710);
the Center for Risk and Economic Analysis of Terrorism Events (CREATE) at the University of Southern California;
the Center for Research on Environmental Decisions (CRED; NSF Cooperative Agreement SES-0345840 to Columbia
University), the Zurich Insurance Foundation on community flood resilience and the Wharton Risk Management and
Decision Processes Center.
Introduction and the background on National Flood Insurance Program (NFIP)
The costs of natural disasters have grown substantially in past decades with floods being the most
common and most expensive hazard.
The U.S. Federal Emergency Management Agency (FEMA)
estimates that homes in high-risk areas have at least a 1-in-4 chance of flooding during a 30-year period,
while total flood insurance claims averaged $4 billion annually from 2003 to 2012 (FEMA
“Floodmsart.gov”, 2015). Flood-related damage is likely to increase in the future due to sea level rise and
more heavy precipitation events (Knutson et al. 2010). Thus, the availability of flood insurance is important
and salient to homeowners, policymakers and other stakeholders in the United States.
Since 1968 flood insurance has been provided by the National Flood Insurance Program (NFIP)
housed under FEMA. By the end of 2014, the NFIP had 5.55 million policies-in-force and $1.28 trillion in
coverage nationwide, mostly concentrated in coastal states such as Florida, Texas, Louisiana, New Jersey,
California, and South Carolina. To ensure affordability, about 20 percent of all insurance policies in NFIP
– mostly concentrated in flood-prone areas – are heavily subsidized (GAO, 2013). This subsidy structure
was financially sustainable until the aftermath of Hurricane Katrina, when NFIP found itself $18 billion in
debt, leading Congress to pass the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12). BW-12
would gradually increase premiums on discounted policies to full-risk levels for second homes and those
subject to repetitive flooding. However, in March 2014, outcries from residents claiming they could not
afford the new premiums led to the passage of the Homeowner Flood Insurance Affordability Act (HFIAA14) that delayed or eliminated these premium increases.
To continue the push towards pricing reform, HFIAA-14 provided funding for a study on
affordability of flood insurance by the National Academies of Science to be considered when the NFIP is
up for renewal in 2017 (National Research Council, 2015). To inform the ongoing affordability dialogue,
this paper conducts a study on Charleston County, South Carolina, a county vulnerable to both inland and
hurricane flood risks to answer the following question: how would risk-based pricing of flood insurance
impact its affordability in Charleston County, and more importantly, what can be done to address any
1
associated affordability issues? We propose that the NFIP should consider the following two guiding
principles for insurance:

Premiums should reflect true risk to correctly signal to individuals the dangers they face and
encourage investment in cost-effective mitigation measures. The existing structure of discounted
premiums in the NFIP provides misleading information about risk and potentially encourages
excessive development in high flood-hazard areas instead of risk mitigation

Issues of equity and affordability should be addressed, but not through subsidizing insurance
premiums. Residents requiring financial assistance to purchase insurance could receive vouchers
funded by general taxation rather than paying a discounted premium. Moreover, we suggest that
these vouchers should be complemented with mitigation incentives. More details on these guiding
principles for insurance can be found in Kunreuther and Michel-Kerjan (2011) and Kunreuther,
Pauly and McMorrow (2013)
Based on these two guiding principles we seek to understand the impact of increasing premiums to reflect
the full flood risk on a subset of existing Charleston Country NFIP policyholders who live in Special Flood
Hazard Areas (SFHAs) where the annual risk of a flood is 1-in-100 or greater, and who are currently
receiving a NFIP premium discount despite their location in a high flood risk area. We then explore how
the government can help these policyholders mitigate risk and afford risk-based pricing of flood insurance
by examining the theoretical application of a voucher program proposed by Kousky and Kunreuther (2014).
We conclude with recommendations for future research.
Application to Charleston County, South Carolina
South Carolina is a coastal state situated in the southeastern United States. It ranks sixth in the
nation for the number of NFIP policies-in-force with 200,588 policies at the end of April 2015 (FEMA
“Policy Statistics”, 2015). Flood insurance policies are concentrated in the vulnerable coastal areas in the
state with 92 percent of policies in five counties with extended ocean shorelines: Charleston, Beaufort,
Horry, Berkeley and Georgetown. We selected Charleston County for this analysis because of its high
concentration of policies and geographical flood risk, as well the number of residents below the poverty
2
line compared to the other four top NFIP counties. The county has a median annual household income of
$50,289 with 17.7 percent below the poverty line. (See Zhao et al., 2015 for more details).
Figure1.MapofSouthCarolina(top)andCharlestonCounty(bottom,highlightedinred
borders)
3
Flood Insurance and Home Affordability in Charleston County
Benefitting from the Wharton Risk Management and Decision Processes Center’s unique access to
the NFIP policy portfolio, we utilize the 57,235 NFIP policy records for Charleston County collected across
all occupancies (single-family residential, two-to four-family residential, other residential, and nonresidential) from the NFIP policy database as of December 31, 2012. (See Zhao et al., 2015 for more details
on the individual policy records collected from the NFIP database). Premiums reflecting true risk are
primarily a function of the selected coverage limits, flood zone location, and the house’s structural features
such as the height of the lowest floor relative to the Base Flood Elevation (BFE). The BFE is the estimated
height of floodwaters during a 100-year flood. Of these factors, flood zone location plays an important role
in pricing and is determined from Flood Insurance Rate Maps (FIRMs) issued by FEMA. All else being
equal, premiums are highest for homes located in the high risk Special Flood Hazard Areas (SFHAs)
comprised of aggregate flood zones A and V (see FEMA.gov and Zhao et el., 2015 for flood zone
definitions and details). In the SFHAs, flood insurance is mandatory for households with a federally backed
mortgage, although FEMA estimates that lender compliance for this mandatory purchase is at most about
75 percent.
Structures constructed after a community adopted a Flood Insurance Rate Map (FIRM) and flood
guidelines must adhere to building codes and are generally structurally safer than pre-FIRM property. The
NFIP allows for two main types of discounted policies associated with the adoption of the FIRM: pre-FIRM
structures and property that is grandfathered. Pre-FIRM rates, applied to properties constructed prior to the
adoption of FIRMs, are based on limited underwriting information with premium discounts given to
encourage greater participation in the program. Note that not all buildings with pre-FIRM policies are
discounted, because some have chosen to receive elevation ratings and then switch to full risk rates that are
lower than the pre-FIRM subsidized rates that they otherwise would have been charged. Grandfathered
properties are those that were built in compliance with the hazard map in effect at the time of construction,
and are allowed to maintain a lower rate if a new map moves them to a higher risk zone. Structures built
after FIRMs have adopted are charged risk-based flood insurance premiums.
4
From Charleston County’s 57,235 NFIP policies collected, 17,236 (30 percent) are identified as
pre-FIRM, so that a significant portion of Charleston policies could be subsidized. Of the 17,236 pre-FIRM
policies, 78 percent (13,395) are located in the high-risk 100-year floodplain A Zone, 3 percent (569) in the
high risk 100-year coastal floodplain V Zone, and 19 percent (3,272) in the low risk X Zone. Prior to
implementation of BW-12, in Charleston County the annual median pre-FIRM premiums were $1,113 for
the A Zone, $3,321 for the V Zone, and $365 for the X Zone.
Given the subsidized policies, rate increases could impose an additional financial burden on lowand middle-income homeowners in Charleston Country. Although the median household income ($50,289)
in Charleston County is higher than the state average ($44,623), home ownership is especially costly for
low- and middle-income residents because of high property values. According to a 2014 Housing Needs
Assessment by the county government, a resident’s income must be at least 181 percent of the county
median household income to afford an average priced home in Charleston County (Charleston County
Zoning & Planning Department, 2014).
Movement to Risk-based Premiums
Most pre-FIRM policies are currently subsidized, on average paying 40-45 percent of the actual
risk-based premium (GAO, 2013). Based on this estimate, an increase in risk-based premiums could have
a significant impact on a homeowner’s flood insurance premium to income ratio. To illustrate this point
assume that a homeowner in the A Zone is currently paying 40 percent of the true risk premium assumed
to be the median A Zone pre-FIRM in Charleston County of $1,113, or approximately 2 percent of
Charleston’s 2012 median household income of $50,289. Movement to a non-subsidized risk-based median
premium for this property of $2,783 would now be 6 percent of the median household income. Similarly
for the V Zone, assume a homeowner is currently paying 40 percent of the true risk premium assumed to
be the median V Zone pre-FIRM premium of $3,321, or 7 percent of the median household income.
Movement to a non-subsidized risk-based median premium of $8,302 would now be 17 percent of the
median household income.
5
The exact magnitude of premium increase varies by homeowner, depending on key factors ranging
from amount of coverage purchased to structural characteristics of a property. Thus, we estimate premium
increases for a specific subset of individual SFHA pre-FIRM policies in Charleston Country in conjunction
with the 2011-2012 insurance rating manuals, aggregating the data for the A and V Zones in Charleston
County. For details on the how risk-based premium is calculated for individual policies, please refer to the
example in Appendix A as well as Zhao et al. (2015) including the NFIP rate tables utilized.
Selection of policies for risk-based premium calculation
We selected a subset of pre-FIRM policies in Charleston to measure the impact that premium
increases will have on policyholders by focusing on pre-FIRM policies in zones A and V with single-family
occupancy, no basement, and no elevation rating. As shown in Table 1 there are 5,423 policies that meet
these criteria from the A Zone, and 293 policies from the V Zone. We then calculated the pre-FIRM
premiums for these properties using either the Oct. 2011, May 2012 or Oct. 2012 Flood Insurance Manual
depending on a policy’s effective date. We compared this calculated pre-FIRM premium against the actual
premium in the NFIP database and included in our analysis only the 3,691 policies from the A Zone (68
percent of total 5,423 possible) and 263 policies from the V Zone (90 percent of total 293 possible) where
the calculated and actual premiums were within 1 percent of each other.
Table 1. Criteria applied to select Charleston policies for premium increase calculation
Criteria
A Zone
V Zone
Post‐FIRM policies (all occupancies)
30,326 2,086
Pre‐FIRM policies (all occupancies)
13,395 569
No elevation rating
8,813 531
No basement & single occupancy
5,423 293
Percent difference between calculated pre‐FIRM premium and actual premium is less than or equal to 1%
3,691 263
With basement & non‐single occupancy
3,390 238
With elevation rating
4,582 38
Unknown pre or post‐FIRM
2 ‐
Total policies in zone
43,723 2,655
Total number of policies in Charleston
X Zone
7,585
3,272
3,255
2,144
N/A
1,111
17
‐
10,857
57,235
Calculated increase in premium for the A Zone and V Zone
For these 3,691 A zone policies and 263 V zone policies and again using the appropriate 201112 insurance rating manuals we re-priced the discounted pre-FIRM policies with post-FIRM rates
(assuming that post-FIRM insurance rates reflect true risk) in order to understand how rates might change
6
when discounts for pre-FIRM building are completely removed. Since our selected policies have no
elevation rating, we assume the building is at one foot below BFE (-1 BFE) for Zone A and at BFE (0 BFE)
for Zone V when applying the appropriate post-FIRM rates (the Insurance Manual provides post-FIRM
rates only down to -1 BFE in Zone A and 0 BFE in Zone V). It is likely that many of the pre-FIRM
properties will be more than 1 foot below BFE and thus our estimates of full-risk premium represent the
lower bound of the possible premium increases. (See Appendix A for an example of calculation and Zhao
et al., 2015 for further details including the NFIP rate tables utilize). After calculating the risk-based
premiums for the 3,691 pre-FIRM A Zone policies, we found that 49 percent of the policies would have
premium increases between 41 to 100 percent, 30 percent of the policies have premium increases between
101 to 160 percent, and 13 percent have premium increases between 161 to 220 percent. The remaining 8
percent of policies have increases over 220 percent and as high as 340 percent. The average percent increase
in premium is 108 percent while the median is 99 percent. Figure 2 shows the distribution of percent
increase in premiums for these policies.
Figure2.DistributionofpoliciesbypercentincreaseinpremiumforAZone,frompre‐FIRM
topost‐FIRMrates
Similarly, Figure 3 shows the premium increase for the 263 V Zone pre-FIRM policies with
premium increase calculated. Less than 1 percent of the policies have premium less than 100 percent of
their pre-FIRM rates, 57 percent of the policies have premium increases between 101 to 160 percent, and
7
43 percent of the policies have premium increases between 161 to 380 percent. The average percent increase
from pre-FIRM to risk-based premiums is 159 percent and the median is 151 percent.
Figure3.DistributionofpoliciesbypercentincreaseinpremiumforVZone,frompre‐FIRM
topost‐FIRMratesthevarianceseeninpercentincreaseofpremium
Amountofcoverageasapotentialpredictorof premium increase from pre-FIRM to post-FIRM
In calculating premiums for individual policies, we found that the amount of coverage purchased
by a homeowner affects the percentage increase in premium from pre-FIRM to post-FIRM due to the current
pricing tables. For our 2012 policies examined, a single-family residence could purchase up to $60,000 in
basic building coverage and $25,000 in basic contents coverage at one rate with an option to purchase
additional coverage up to $190,000 for building and $75,000 for contents at a different rate. In contrast to
pre-FIRM basic building and content coverage rates that are lower than the additional coverage rates, postFIRM basic building and content coverage rates are generally significantly higher than the additional
coverage rates.
Figure 4 depicts how premiums net of deductible factors in the A Zone change as coverage
increases for a single-family post-FIRM structure with no basement, enclosure or crawlspace at -1 BFE in
the A Zone. The black solid line represents the amount of pre-FIRM premium paid as building coverage
increases based on insurance rates from the October 2012 insurance manual. The gray solid line shows the
8
post-FIRM premium as building coverage increases, using rates for buildings with one floor, no basement,
and -1 BFE. The dashed black line (secondary y-axis) illustrates the percentage increases in premium
moving from pre-FIRM to post-FIRM rates as coverage increases, or the difference between the pre-FIRM
and post-FIRM premiums at any coverage amount (primary y-axis).
When less than $60,000 of coverage is purchased (i.e., below 600 on the x-axis), the percentage
increase in premium is almost 500 percent. As coverage increases, the total percentage increase in premium
decreases, approaching closer to 100 percent at full $250,000 of coverage (secondary y-axis). This reveals
that for policyholders with a significant amount of additional coverage, the total percentage change in
premium going from pre-FIRM to post-FIRM will be smaller because of the relatively cheaper post-FIRM
additional coverage rates. However, for a policyholder with only basic building coverage, the total
percentage premium increase is significantly greater at a nearly 500 percent increase. This percentage
increase difference is also reflected through the slopes of pre-FIRM and post-FIRM premiums in Figure 4.
From the NFIP rating manuals pre-FIRM rates for basic coverage is $0.76 per $100 of coverage while
additional coverage is $0.77. Thus, when additional coverage begins at greater than $60,000 of building
coverage (i.e., 600 on the x-axis), the change in the slope of the pre-FIRM black solid line is minimal.
However, post-FIRM rates are $4.40 for basic coverage and $0.97 for additional coverage – thus now when
additional coverage begins beyond $60,000 of building coverage, the slope of the post-FIRM solid gray
line is drastically flatter due to the lower cost of additional coverage as compared to the relatively higher
basic coverage rates.
9
Figure4.Buildingcoverageandpremiumbeforedeductibleandfees,AZone
For the V Zone, we found a similar but more pronounced relationship between coverage and percent
increase in premium for the same type of structure as in Zone A as depicted in Figure 5. The dashed black
line illustrates that as rates increase to post-FIRM levels, policyholders with less coverage are more likely
to face higher percentage increase in premium, now over 600 percent for those with basic building coverage
only (secondary y-axis).
Figure5.Buildingcoverageandpremiumbeforedeductibleandfees,VZone
10
We can furthermore explore the impact that coverage has on premium increases with two specific
examples. Consider Policyholder A, who purchased a policy with full $250,000 building and $100,000
contents coverage, and $1,000 each in building and contents deductible, in the A Zone with occupancy as
single family, single story building with no basement. If we assume that policyholders purchase enough
building coverage to insure their home value that is five times their annual household income, we expect
Policyholder A to have an annual income of $50,000 (one-fifth of $250,000 in building coverage). In this
case, the flood insurance premium will rise from $3,513 to $5,596 per year, reflecting an increase
from 7.0 percent to 11.2 percent of annual household income. Policyholder B is similar to
Policyholder A in occupancy but purchased only basic $60,000 building and $25,000 content coverage
with deductibles of $1,000 each for building and contents. We assume Policyholder B to have an annual
income of $12,000 (one-fifth of $60,000 in building coverage) and in this case, the flood insurance
premium will rise from $766 to $3,325 per year, reflecting an increase from 6.4 percent to 27.7
percent of annual household income. Premium increases in the V Zone exhibit similar patterns in
relation to coverage amounts. Across the board, the premium increase is significant in absolute terms, but
policyholders with less coverage face higher marginal increases. This could impose unexpectedly greater
burdens on low- and middle-income families who are more likely to purchase lower amount of coverage.
RelationshipbetweenamountofcoverageandpremiumincreaseobservedinCharlestonpolicies
Based on our observations in the previous section, we examine how coverage varies between
policies in different ranges of premium increase in the selected Charleston policies from Zone A and Zone
V. As shown in Table 2, in the A Zone’s 633 properties whose premiums increase between 41 percent and
60 percent, the median building coverage is $250,000 and the median contents coverage is $100,000 – the
maximum amounts of insurance that could be purchased under the NFIP program. In addition, policies with
premium increases between 61 percent and 160 percent have average and median building coverage close
11
to the maximum $250,000. Properties that have building coverage below $200,000 had a much higher
percentage increase in their premiums.
Table 2. Median and average coverage for policies in each bracket of percent increase in premium,
A Zone
Percent increase in A Zone premium from pre‐FIRM to post‐FIRM at ‐1 BFE elevation
≤ 40% 41‐60% 61‐80% 81‐100% 101‐120% 121‐140% 141‐160% 161‐180% 181‐200% 200‐220% 220‐240% 240‐260% 260‐280% >280%
Number of policies, #
Selected A Zone policies
177 633 403 784 363 279 457 204 169 107 54 22 16 23
Median building coverage Average building coverage
Median contents coverage
Average contents coverage
Coverage, $
250,000
228,997
100,000
90,240
250,000
246,021
100,000
89,198
250,000
241,016
52,500
45,722
250,000
243,218
20,000
32,296
238,000
220,963
29,000
35,302
217,900
207,657
46,200
36,625
250,000
224,859
10,000
14,383
186,050
173,040
10,200
14,584
161,000
154,787
‐
9,789
136,500
131,703
‐
7,661
117,400
111,833
5,000
9,320
97,750
83,395
10,700
11,241
88,550
82,344
5,600
8,719
For the V Zone, we found a pattern similar to properties in the A Zone. As shown in Table 3, those
properties that have the highest percent increase in premium have the lowest average and median building
coverage. For example, for premium increases greater than 280 percent, average building and content
coverage is $79,300 and $11,800 respectively. Similar to the A Zone, there are two factors that explain this
trend: For pre-FIRM policies in the Oct. 2012 manual, the premium per $100 of additional coverage is
twice that of basic coverage for both building and contents. For post-FIRM rates, the reverse is true: rates
for additional building coverage cost only 50 percent of basic building coverage, and rates for additional
contents coverage cost 75 percent of basic contents coverage.
Table 3. Median and average coverage for policies in each bracket of percent increase in premium,
V Zone
Percent increase in V Zone premium from pre‐FIRM to post‐FIRM at ‐1 BFE elevation
≤ 40% 41‐60% 61‐80% 81‐100% 101‐120% 121‐140% 141‐160% 161‐180% 181‐200% 200‐220% 220‐240% 240‐260% 260‐280%
>280%
Number of policies, #
Selected V Zone policies
‐
‐
1 ‐
38 33 78 72 11 11 8 5 1 5
Median building coverage Average building coverage
Median contents coverage
Average contents coverage
Coverage, $
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
100,000
100,000
‐
‐
‐
‐
250,000
249,342
100,000
99,342
250,000
250,000
52,500
46,630
250,000
245,281
12,800
24,013
250,000
220,094
27,650
36,089
204,100
203,100
15,500
15,036
154,900
156,927
20,000
20,491
150,000
131,263
21,050
18,125
115,000
118,920
16,600
11,960
121,000
121,000
22,100
22,100
80,700
79,300
17,100
11,800
Conclusions on calculated premium increase and premium increase for other policies in Charleston
Of the specific single-family policies selected for our analysis, premiums increased by 108 percent
on average for the 3,691 pre-FIRM A Zone policies, and by 159 percent on average for the 263 pre-FIRM
V Zone policies. The policies we selected do not represent all the policies that could incur premium
12
60,600
63,926
‐
3,896
increases in Charleston County if the NFIP moved to risk-based pricing. We focused only on 28 percent of
the total pre-FIRM Zone A policies, and 46 percent of pre-FIRM V Zone policies in the county that are
single-family occupancy buildings with no basement where we assumed that their true-risk elevation would
be -1 BFE. However, based on our analysis, it is clear that policyholders selecting the basic amounts of
building and content coverage would be most severely impacted by rate increases. For many of these
policyholders it is likely these low coverage amounts are all they can afford given their low income or as
much insurance as they require, given the value of their homes.
FEMA has estimated that about half of subsidized pre-FIRM policies in Charleston are primary
residences which, under BW-12, could have kept their subsidy until sale, renewal of a lapsed policy, or
repeated flooding. Although BW-12 was structured in such a way that primary residents would not face
premium increases immediately, many homeowners voiced concerns about the law’s impact on property
value since premiums would be risk-based at the time the house was sold, thus lowering the selling price
of the house. Under HFIAA-14, a buyer can assume the prior owner’s flood insurance policy and retain
the same rates as the previous homeowner was charged.
Risk Mitigation and Affordability
Risk-based premiums create incentives for homeowners to invest in risk mitigation measures
because insurance is cheaper for safer homes to reflect lower claims payments. For floods, the most
effective mitigation method is house elevation and it’s one of the few measure that FEMA recognizes in
reducing flood insurance premiums. Although elevating a house a few feet can decrease its risk-based
premium by 70 to 80 percent, saving homeowners thousands of dollars annually, elevation is expensive and
inconvenient. The project takes 3 months on average, during which time homeowners must relocate. In our
analysis we are assuming that costs range from $25,000 to $75,000 depending on the size, type and location
of the house, but for some homes located in high hazard areas the costs can be somewhat higher. (See Zhao
et al., 2015 for detailed calculations for elevation costs) One solution is for the policyholder to obtain a
low-cost loan from the government, spreading the costs of elevation over time.
13
Based on the trade-off between risk mitigation costs and premium reductions, Kousky and
Kunreuther (2014) propose a voucher program coupled with loans for mitigation to address the affordability
problem of flood insurance. The program has two key components: first, insurance premiums are based on
risk; second, vouchers are used to offset both the premium and the cost of the loan for risk mitigation. The
program is recommended only for houses in the A and V Zones and is means-tested using annual household
income. In future studies, it will be important to determine the reasonable percentage of a household’s gross
income that should be allocated to flood insurance. Following Kousky and Kunreuther, we will assume a
reasonable level to be 5 percent, so that a household earning $50,000 gross income per year is expected to
contribute $2,500 to flood insurance. After the policyholder’s $2,500 contribution, the voucher pays any
excess flood insurance costs.
If the government provides insurance vouchers without requiring risk mitigation, a policyholder
will have no incentive to elevate the house since the size of the voucher will be determined by a means test
(e.g., 5 percent of gross income). The affordability program can be illustrated by focusing on representative
Policyholders A and V characterized in the previous sections under the assumption that they are now paying
risk-based premiums.
Example 1: Zone A Policyholder
Representative Policyholder A would be paying a risk-based
premium of $5,596 given that his house is one foot below BFE. Assume the homeowner has an annual
household income of $50,000 and contributes 5 percent of household income towards flood insurance with
the voucher covering any cost about $2,500. As shown in Table 4, if the homeowner does not elevate the
house, the government pays $3,096 in insurance vouchers when the premium increases to full-risk levels.
Suppose Policyholder A’s house was raised two feet so it is one foot above BFE, the risk-based
premium would then fall to $839 based on the data in Table 4. More details on premium calculations can
be found in Appendix A and Zhao et al., 2015. Three cost scenarios are considered for elevation – low,
medium or high cost, estimated based on FEMA’s guide to flood risk mitigation for homeowners.
14
(http://www.fema.gov/floodplain-management/homeowners-guide-retrofitting) To elevate the home, the
owner takes a 20-year, 3 percent interest loan and makes annual loan payments in addition to the reduced
risk-based premium. When the elevation cost is low, the annual payment would be $2,494 comprised of
$839 in premium and $1,656 in mitigation loan payment. Table 4 shows that at low and medium elevation
costs scenarios, total cost for risk mitigation and premium is less than the premium paid for a discounted
policy with no mitigation. Compared to a $3,096 voucher issued when there is no mitigation required,
mitigation leads to greater cost savings when the elevation cost is at low or medium levels. In fact, if
mitigation were to be required for a homeowner to receive a voucher, Policyholder A would not need to
receive a voucher at all when elevation costs are low, since the loan cost and the premium would be less
than $2,500.
Example 1. A Zone Homeowner (all figures in $ USD)
Insurance voucher without mitigation
Full‐Risk Premium
Homeowner pays 5% gross income
Flood insurance voucher from the government
Insurance voucher with mitigation
Cost to elevate 2 feet
Annual loan payment (3% interest, 20 years)
Premium after elevation
Homeowner pays 5% of gross income
Flood insurance voucher from government
5,596
2,500
3,096
Low
24,635
1,656
839
2,494
‐
Median
50,970
3,426
839
2,500
1,764
High
74,756
5,025
839
2,500
3,363
Table 4. Voucher Costs to the Government in Zone A with and without Mitigation
Example 2: Zone V Homeowner
Savings generated from risk mitigation are much greater in the V
Zone. Even when elevation costs are high, the reduction in losses from risk mitigation creates enough
savings in premium reduction to justify the investment, as shown in Table 5.
15
Table 5. Voucher Costs to the Government in the V Zone without and with Elevation
Example 2. V Zone Homeowner (all figures in $ USD)
Insurance voucher without mitigation
Full‐Risk Premium
Homeowner pays 5% gross income
Flood insurance voucher from the government
Insurance voucher with mitigation
Cost to elevate 2 feet
Annual loan payment (3% interest, 20 years)
Premium after elevation
Homeowner pays 5% of gross income
Flood insurance voucher from government
19,218
2,500
16,718
Low
24,635
1,656
5,304
2,500
4,460
Median
50,970
3,426
5,304
2,500
6,230
High
74,756
5,025
5,304
2,500
7,829
Affordability Program across Income Groups
While the voucher program is generally cost effective for annual household income at $50,000 it
becomes less financially attractive when household income falls below $10,000.We applied the voucher
program across the household income distribution by changing the amount of coverage for our
representative Policyholder A in the A Zone and V Zone based on household income, holding all other
variables constant.
We determined the amount of insurance coverage for each income bracket by assuming that the
property value of the house was five times annual income and that the homeowner purchase full insurance
coverage up to the NFIP maximum of $250,000. In Charleston County, the median value of an owneroccupied house was $240,000 which is approximately 5 times the median income in the county (see Zhao
et al., 2015 for more details). Within each income bracket, we used the median income to determine the
implied coverage amounts. For example, in the income bracket of $10,000-20,000, we used the median
income of $15,000 to estimate home value so that building coverage is $75,000. When household income
exceeded $50,000 we assumed the homeowner purchased the maximum flood insurance for building
coverage of $250,000. Contents coverage is assumed to be in the same proportion as the building coverage
is to maximum coverage available. Since $75,000 is 30 percent of the maximum building coverage of
$250,000, we assumed the contents coverage will be 30 percent of the maximum contents coverage of
16
$100,000. We then calculated the risk-based premium for a house at -1 BFE and when the structure is
elevated two feet to +1 BFE assuming that the house has no basement, a single floor, single family
occupancy and $1,000/$1,000 in building/contents deductibles.
For the income bracket $10,000-20,000, the premium is $3,499 annually when the house is not
elevated and $580 annually when it is elevated by 2 feet. Based on a median income of $15,000, the
homeowner would be responsible for paying up to 5 percent of annual household income (i.e., $750) to
cover annual insurance premiums and mitigation loan costs. The last row in Table 6 shows that elevation
is a cost-effective option only when elevation cost is low, in which case the government is responsible for
issuing a $1,485 voucher. If the cost of elevating the house by 2 feet is at a medium or high level, then the
government voucher cost is lower if it only covers the excess insurance cost without requiring mitigation.
Table 6. Applying the voucher program to a household with annual income between $10,000-20,000
Household income bracket Median income
Implied home value
Implied building coverage
Implied contents coverage
Post‐FIRM premium @ ‐1 BFE
Post‐FIRM premium @ +1 BFE (if building is elevated) 10,000‐20,000
15,000
75,000
75,000
30,000
3,499
580
Voucher design options
No mitigation Low cost required elevation Premium 3,499 580
Elevation cost, if mitigation required ‐
1,656
Total cost
3,499 2,235
Homeowners pay (5% of income)
750 750
Government pay via vouchers
2,749 1,485
17
Med cost elevation 580
3,426
4,005
750
3,255
High cost elevation 580
5,025
5,604
750
4,854
The change in government voucher cost across income brackets is depicted in Figure 6 where one can see
that the voucher cost decreases as annual income increases. When elevation is required as a condition for
a voucher and the cost of elevation is low, then the government’s cost of a voucher program is lower for all
incomes above $15,000 brackets than if it were issuing vouchers solely to cover insurance.
Figure6.Buildingcoverageandpremiumbeforedeductibleandfees,VZone
In the V Zone, a voucher with a mitigation loan is always financially preferable regardless of
elevation costs once income reaches $20,000 as shown in Figure 7. As was the case for the A Zone, when
annual household income is below $10,000 it is most cost-effective for the government to offer a voucher
without requiring mitigation. When annual household income is between $10,000 and $20,000, coupling a
voucher with mitigation is less expensive for the government when elevation cost is low. For the $20-$30k
and higher income brackets, requiring mitigation as a condition for a voucher is more cost effective even
when the cost of elevating the house is high.
18
Figure7.Governmentvouchercostbyvoucherprogramdesignoptionsacrossdifferent
householdincomebracketsintheVZone(HouseValueis5timesHouseholdIncome;Insurance
CoversFullValueofHomeminusDeductible)
Aggregation for Charleston County
Estimating the size of a voucher program for Charleston County requires a detailed analysis of the
income levels and distribution of households across flood zones. According to FEMA, 16 percent of the
2012 NFIP policies-in-force in Charleston Country are subsidized. This amounts to 10,619 policies, which
is a subset of the 17,236 pre-FIRM policies in the county across flood zones A, V and X. We do not have
any information as to where these properties are geographically or their insurance costs if premiums were
risk-based. As a starting point, we aggregated the voucher cost for the subset of pre-FIRM A and V Zone
policies selected for premium increase calculations and extrapolated the results to other pre-FIRM policies
in the A and V Zones.
Program cost for the subset of pre-FIRM policies used for premium increase calculations
For each of the 3,954 pre-FIRM policies selected (3,691 in the A Zone and 263 in the V Zone), we
calculated how much the voucher would cost the government with or without mitigation for low, medium
19
and high elevation costs. It is important to remember the criteria we used to select the 3,954 policies for
pre-FIRM calculation. First, we selected only pre-FIRM policies for homes with single occupancy with no
basement and no elevation ratings in the A and V Zones. Second, we calculated the pre-FIRM premium
for these policies using the insurance manuals and compared the calculated premium to actual pre-FIRM
premium and only examined policies where the difference between calculated and actual premium was less
than 1 percent.
Because the NFIP collects no information on the policyholder’s income levels, we assumed that a
policy’s building coverage is equivalent to its house value, assumed to be five times the annual household
income (see Zhao et al., 2015 for more details). As shown in Table 7, the cost of a voucher program without
required mitigation for the 3,691 policies in the A Zone is $4.1 million, and $1.6 million for the 263 policies
in the V Zone that we examined. In the A Zone when mitigation is required and elevations costs are low,
the government can save $3.4 million in voucher cost by requiring mitigation; however, at medium and
high elevation costs, mitigation becomes more expensive than offering vouchers alone. In the V Zone, the
government pays less when the voucher is coupled with mitigation, regardless of elevation cost levels. The
high number of properties in the A Zone relative to the V Zone drives the cost of the voucher program for
this subsample. This is reflective of the overall characteristics of policies in Charleston County, where 67
percent of policies-in-force are in the A Zone, compared to 5 percent in the V Zone.
(all figures in $million)
Voucher without mitigation
Low elev. cost
Voucher with Medium elev. cost
mitigation loan
High elev. cost
Cost for A Zone
(3,691 policies)
4.1
0.7
6.6
12.5
Cost for V Zone
(263 policies)
1.6
0.5
1.0
1.4
Costs for A and Z Zones
5.7
1.2
7.6
13.9
Table 7. Cost of Voucher Program to Federal Government with and without Required Mitigation
for 3,954 pre-FIRM policies selected for premium calculation (3,691 from A Zone, 263 from V
Zone)
20
Estimated total program cost for Charleston County
Our approach in estimating how much a voucher program could cost for Charleston County is to
extrapolate the calculated costs for the subset of policies we examined to all the pre-FIRM A and V Zone
policies in the county. One should bear in mind that this is a rough estimate, because our subset consisted
of single occupancy homes with no basement and no elevation rating, which is not representative of all preFIRM policies. There are 13,395 pre-FIRM A Zone policies in Charleston, 3.6 times more policies than
the 3,691 policies we selected. To extrapolate, we multiplied the A Zone program costs for the 3,7921
policies (for each of the three estimated elevation costs) by the factor 3.6, assuming that all policies would
have either low, medium or high elevation costs (e.g., $0.7M low elevation cost in the A Zone from Table
7 is multiplied by 3.6 to get $2.6M in Table 8). In the V Zone, there are 569 policies, 2.2 times more than
the 263 policies we selected and this factor was used to estimate county level costs for the V Zone. The
results can be found in Table 8 and are graphically illustrated in Figures 8a, 8b and 8c,.
Table 8. Extrapolated Program Cost for Charleston County
Extrapolated cost for A Zone
(all figures in $million)
(13,395 policies)
Voucher without mitigation
14.8
Low elev. cost
2.6
Voucher with Medium elev. cost 23.9
mitigation loan
High elev. cost
45.3
Extrapolated cost for V Zone
(569 policies)
3.5
1.1
2.1
3.0
Figure8a.ProgramCostsintheAZoneswithDifferentVoucherOptions
21
Total A and V Zone Cost
18.3
3.7
26.0
48.3
Figure8b.ProgramCostsintheVZoneswithDifferentVoucherOptions
Figure8c.CombinedProgramCostsinAandVZoneswithDifferentVoucherOptions
Based on the county-wide cost estimates shown in Figure 8, the Total Program Costs summed from
A Zone and V Zone is the lowest for vouchers coupled with a mitigation loan when elevation cost is low.
However, when the total cost is examined by zone, the cost of Voucher + Mitigation Loan program is
always less expensive than the voucher without mitigation in the V Zone. In the A Zone it is more desirable
not to elevate homes when its costs are medium or high.
Several takeaways from these cost estimates are worth noting when designing a voucher program
for Charleston County and perhaps other flood-prone areas of the country. First, a voucher coupled with a
22
mitigation loan can cut the government’s voucher cost by more than 60 percent when elevation costs are
low. Second, even when elevation cost is high in the more hazardous V Zone, coupling vouchers with
mitigation loans still leads to cost savings for the government. Cost savings are not achievable by elevating
homes in the A Zone when costs of undertaking this investment are medium to high.
State-level Natural Disaster Programs in South Carolina
South Carolina currently has several programs to assist homeowners in purchasing insurance and
fortifying homes against natural disasters that addresses issues of affordability. The 2007 SC Omnibus
Coastal Insurance Act created the Safe Home grants program for low- and middle-income homeowners to
retrofit primary residences against high-wind and hurricane damages. Administered by the state’s
Department of Insurance, the program offers matching and non-matching grants depending on the
recipient’s household income and home value. Families making less than 80 percent of the county median
household income and with home value below $150,000 qualify to receive up to $5,000 in non-matching
grants. Families with income above that threshold and home value less than $300,000 are eligible for up
to $5,000 matching grant. From 2008 to 2011, the Safe Home program awarded 2,500 grants totaling $12.1
million. Of the recipients, 63 percent qualified as low-income who received non-matching grants. Currently,
the home grant does not cover flooding-related mitigation measures but could be a potential source of
funding for homeowners looking to elevate homes in the future.
South Carolina also has several tax incentives for risk mitigation against natural disasters. The
Residential Retrofit Tax Credit provides state income tax credits up to $1,000 for expenses incurred when
retrofitting a home against natural disasters. From 2008 to 2011, 670 Residential Retrofit Credits have been
claimed totaling $781,106 (South Carolina Department of Insurance, 2013). The Excess Insurance Premium
Tax Credit allows homeowner to claim up to $1,250 in income tax credit against excess premium paid on
property and casualty insurances. Excess premium is defined as the portion of the premium greater than 5
percent of the taxpayer’s annual gross income. Additionally, the state offers Catastrophe Saving Accounts,
23
which are interest-bearing accounts not subject to state income taxes if funds are used for qualified
catastrophe expenses.
Conclusions and Topics for Future Research
Accurately priced and affordable flood insurance policies for homeowners in hazardous areas are
important aspects in the flood insurance market but they require that homeowners receive assistance in
ways other than through subsidized premiums. Based on the proposal in Kousky and Kunreuther (2014),
we find that coupling vouchers with mitigation requirements – in this case, elevating the house – is cost
effective when the elevation costs are low. However, mitigation requirements do not always guarantee cost
savings for the government, especially when household income is below $10,000, or when elevation costs
are medium or high. The analysis also shows that separate eligibility criteria should be devised for A and
V Zones because mitigation leads to greater premium reductions in the latter zone. For example, for some
homes in Zone A, a government voucher would not be tied to a mitigation requirement if the household’s
income is below a certain threshold, or when the costs of elevating the house is extremely high.
The study of affordability in Charleston County has raised several questions for further research.
First, elevation is not feasible for all homes. For instance, the 150 year-old homes in Charleston’s historic
district cannot be elevated due to historical preservation regulations. Furthermore, the nonmonetary costs
of home elevation, such as owner’s lodging inconvenience during construction, should be accounted for in
analyzing the total costs. At the household level, there are other mitigation measures aside from elevating
one’s home that might lead to lower NFIP premiums. These measures include modifying the ground floor
with wet flood proofing and moving all habitable areas to the second floor in multi-story homes, and dry
flood proofing for non-residential structures (National Research Council 2015; FEMA “Floodproofing”,
2015). In HFIAA-2014, FEMA is required to consider other mitigation measures that can reduce premium,
such as low-cost retrofitting of structures that experience shallow water flooding. Alternatively, actions
affecting behavior change could also be considered. For instance, studies have shown that offering a higher
deductible as a default can lead to more people selecting that option (National Research Council, 2015).
24
Flood risk mitigation at the community level should be further explored and developed as a part of
the ongoing effort in ensuring affordability. The recent report on the affordability of the NFIP by the
National Research Council explored three community-based measures of flood risk reduction. First, FEMA
could lower the barriers to joining the Community Rating System, which offers premium reductions for
communities in compliance with floodplain management requirements. Second, FEMA could encourage
communities to direct resources towards risk mitigation for clusters of neighborhoods and to promote the
knowledge of mitigation to residents. The recent pilot project, “Resilient Neighbors Network (RNN),”
funded by FEMA has met success in motivating communities to become more engaged .in risk mitigation.
The third option considered is community-level insurance policies, where communities purchase a group
policy on behalf of all properties at risk of flooding.
Further research should seek to understand which eligibility criteria policy would be the most
feasible and practical to administer. For example, an affordability program could be means-tested by home
value instead of income when considering who will receive assistance. Based on our assumptions,
homeowners would contribute 5 percent of their annual household income towards flood insurance
vouchers. If on average, home value is 5 times the annual household income, the 5 percent contribution
would translate to an amount equal to 1 percent of home value. Another eligibility criteria considered in
HFIAA-14 is a capped premium approach, where flood insurance is defined as not affordable if the
premium becomes a certain percentage of the policy coverage.
Finally, estimating voucher program costs requires considerations of more comprehensive
methodologies. The methods in this study relied heavily on the relationship between coverage and
household income for cost estimations. More sophisticated alternatives for larger aggregation across
regions will be important for accurate cost-benefit comparisons between various policy options.
25
Appendices
Appendix A. Flood Insurance Premium Increase Calculation
Table A1 details the process by which an agent would price a flood insurance policy in the NFIP regular
pricing program. We followed only steps 1 to 8 for estimating the premium increase. Thus the premiums
do not take into account increase cost of compliance coverage (ICC), Community Rating System (CRS)
discount, and federal fees. ICC coverage purchase is required for all standard insurance policies and for
residential structures to bring it into conformance with state or local floodplain management ordinances.
The increase in premium ranges from $5 to $30 in post-FIRM and $5 to $70 for pre-FIRM policies. The
CRS program provides discounts to all property in a participating NFIP community that improves their
floodplain management programs and makes changes eliminate or reduce exposure to floods. (See
http://www.nfipiservice.com/Watermark/NFIPRatingSys.html for more details on the program). A
federal policy fee of $40 is charged for all new and renewal policies.
Table A1. Premium calculation process
RegularProgram
1.DeterminewhetherthepropertytobeinsuredisPre‐FIRMorPost‐FIRM.
2.DetermineZone.
3.DetermineOccupancy:SingleFamily,2–4Family,OtherResidential,Non‐Residential,orManufactured(Mobile)
Home.
4.DetermineBuildingType(includingbasementorenclosure,ifany):1floor,2floors,3ormorefloors,splitlevel,
ormanufactured(mobile)homeonfoundation.
5.Determinewhetherbuildinghasabasement(orenclosedareabelowanelevatedbuilding):none,finished,or
unfinished.
6.DetermineElevationDifference.
7.Calculatepremiumusingtheappropriaterates.
8.ApplyappropriatedeductiblefactorifanOptionalDeductibleisselected.
9.TheICCPremiumisnotsubjecttodeductiblefactors.Firstcalculatethedeductibleamount,thenaddintheICC
Premium.
10.ApplyCRSdiscount,ifapplicable.
11.Add$50ProbationSurchargeifbuildingislocatedinacommunityonprobation
12.Addfederalpolicyfee
Source: Flood Insurance Manual (Section V) – Oct 1, 2012
27
The determination of pre-FIRM and post-FIRM premiums for the A and V Zone sample homeowners is
depicted in Table A2 and a more detailed explanation of premium increase calculation in the A Zone policy.
Sample homeowner with full building coverage of $250,000 and full contents coverage of $10,000, and $1,000 in building deductible and $1,000 in contents deductible
Home characteristics: no basement, 1 floor, single family occupancy, no elevation rating under pre‐FIRM
A Zone homeowner
Building coverage purchased
Contents coverage purchased
100 dollars of coverage
600
1900
250
750
Basic coverage
Add'l coverage
Basic coverage
Add'l coverage
Premium based on coverage
Deductible factor for $1,000 for building and $1,000 for contents deductible
Total Premium (not considering, ICC fees, CRS discount, and federal fees)
Increase in premium
% Increase in premium
V Zone homeowner
Building coverage purchased
Contents coverage purchased
100 dollars of coverage
600
1900
250
750
Basic coverage
Add'l coverage
Basic coverage
Add'l coverage
Premium based on coverage
Deductible factor for $1,000 for building and $1,000 for contents deductible
Total Premium (not considering, ICC fees, CRS discount, and federal fees)
Increase in premium
% Increase in premium
Pre‐FIRM
Annual Pre‐FIRM A Zone rates
0.76
0.77
0.96
1.38
3,194
1.1
3,513
Post‐FIRM
Annual Post‐FIRM A Zone rates for ‐1 BFE
4.40
0.97
2.74
0.57
5,596
1.0
5,596
2,082
59%
Pre‐FIRM
Annual Pre‐FIRM V Zone rates
0.99
1.94
1.23
3.32
7,078
1.1
7,785
Post‐FIRM
Annual Post‐FIRM V Zone rates for ‐1 BFE
7.32
3.72
9.55
7.16
19,218
1.0
19,218
11,432
147%
Table A2. Pre-FIRM and post-FIRM premium calculation for sample homeowner in A and V Zones
To illustrate how premium increase is determined, consider Policyholder A with the following:

A pre-FIRM policy in the A Zone

Single family occupancy, single story building with no basement

Full building coverage of $250,000 and contents coverage of $100,000, and $1,000 of building
deductible and $1,000 of contents deductible

The policy became effective in 2012 but after October 2012, thus the October 2012 Insurance
Manual rates shown in Table A2 are used
The pre-FIRM policy premium would be calculated as follows:
28

$456 in basic building coverage ($0.76 per $100 of coverage, for the first $600 of basic coverage)
and $1,463 in additional building coverage ($0.77 per $100 of coverage, for the next $1,900 of
coverage).

$240 in basic contents coverage ($0.96 per $100 of coverage, for the first $250 of basic coverage)
and $1,035 in additional coverage ($1.38 per $100 of coverage, for the next $750 of coverage)

$3,194 total in the base premium. Given the pre-FIRM deductible of $1,000 for building coverage
and $1,000 for contents coverage, the deductible factor is 1.1 and increases base premium by 10
percent to $3,513

It is important to note that deductible factors for pre-FIRM and post-FIRM policies are different.
For pre-FIRM policies, the standard deductible is $2,000 each for building and contents. In our
example, Policyholder A has a deductible of $1,000 each for building and contents thus a
deductible factor of 1.1 is applied to increase the premium base cost. While $1,000 of building
and $1,000 of contents deductibles has a deductible factor of 1.1 in pre-FIRM, the combination
has a factor of 1.0 in post-FIRM.
To understand how rates might change when subsidies for pre-FIRM building are completely
removed, we re-priced the subsidized pre-FIRM policies with post-FIRM rates, assuming that post-FIRM
insurance rates reflect true risk. We assume the building is at 1 foot below base flood elevation (-1 BFE)
for Zone A and at BFE (0 BFE) for Zone V when applying the appropriate post-FIRM rates, since the
Insurance Manual provides post-FIRM rates only down to -1 BFE in Zone A and 0 BFE in Zone V. The
post-FIRM calculated premium for the A Zone’s Policyholder A is $5,596 – an increase of $2,082 (or 59
percent) from the discounted pre-FIRM premium of $3,513.
29
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