The Cost and Affordability of Flood Insurance in New York City

Economic Impacts of Rising Premiums and Policy Options for One- to Four-Family Homes

by Lloyd Dixon, Noreen Clancy, Benjamin M. Miller, Sue Hoegberg, Michael M. Lewis, Bruce Bender, Samara Ebinger, Mel Hodges, Gayle M. Syck, Caroline Nagy, Scott R. Choquette

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Research Questions

  1. To what extent is purchasing flood insurance burdensome for households living in one- to four-family homes in the study area?
  2. How might flood insurance premiums change in the study area?
  3. What effect will flood insurance premium increases have on households and communities in the study area?
  4. What are some promising options for a program that helps reduce the impact of higher flood insurance premiums in the study area and how much would they cost?

This report examines the cost of flood insurance in New York City and the ability of homeowners to afford it. It develops projections for how changes in flood maps and the pricing practices of the National Flood Insurance Program might increase premiums and analyzes the potential consequences of those increases on households and communities. It also develops and evaluates several different approaches for assisting households that have difficulty affording flood insurance. These include financial payments to households to offset the cost of flood insurance as well as mitigation grants and loans that reduce flood insurance premiums by making the home less susceptible to flood risk. This report builds on a previous work by the RAND Corporation on flood insurance in New York City, Flood Insurance in New York City Following Hurricane Sandy.

In addition to informing New York City's efforts to make its communities more resilient to flood risk, this work is also relevant at the national level. Congress instructed the Federal Emergency Management Agency (FEMA) to develop an affordability framework in light of legislation that directs FEMA to gradually eliminate certain program subsidies and to collect additional program fees. This report provides data and analysis that also inform that effort.

Key Findings

  • The cost of flood insurance is currently burdensome for about one-quarter of households in owner-occupied one- to four-family residences in the study area and is much more burdensome for lower-income residents.
  • Removing grandfathering — the ability to base premiums on previous flood zones and elevations when flood maps are updated — dramatically increases premiums for all one- to four-family properties when maps are revised to reflect increasing risk.
  • Such premium increases are projected to reduce property values and property tax revenue from what they would have been had premiums not increased; conversely, premium increases are projected to increase loan defaults and the percentage of households for which flood insurance is burdensome from what they would have been otherwise.
  • There are promising financial-assistance options that use means-tested eligibility criteria rather than general subsidies.
  • Grants and low-interest loans are not particularly attractive given the current rate structure and flood maps but become much more attractive when maps are revised to reflect increasing risk and when pre-FIRM rates and grandfathering are eliminated.
  • Government costs can be significantly lower with an option that combines an income-based subsidy with mitigation, but only under certain conditions.

Recommendations

Policymakers should weigh the advantages and disadvantages of the different approaches for a flood insurance affordability program. In addition, moving forward requires addressing a number of questions.

  • What should be the funding source for the program — city, state, or federal?
  • How should the program be administered?
  • How long should the program remain in effect and should it be available only to current residents or also be available to future buyers who subsequently find themselves with high housing costs relative to income?
  • Should program participants be required to agree to a buy-out when the property is sold to reduce the need for future subsidies?

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    The Affordability of Flood Insurance in New York City

  • Chapter Three

    Flood Insurance Premium Scenarios

  • Chapter Four

    Flood Insurance Affordability in Five Vulnerable Subareas

  • Chapter Five

    Effects of Flood Insurance Premium Increases on Households and Neighborhoods

  • Chapter Six

    Flood Insurance Affordability Program Options

  • Chapter Seven

    Conclusion

  • Appendix A

    Survey Methods

  • Appendix B

    Development of the Project Geodatabase

  • Appendix C

    AMI-Based Income Categories and the Correlation Between Household Income and Net Worth

  • Appendix D

    Components of Housing Costs and Relationship Between Amount of Flood Coverage, Structure Replacement Cost, and Mortgage Balance

  • Appendix E

    Flood Insurance Premium Model

  • Appendix F

    Eligibility Requirements for Pre-FIRM and Grandfathered Rates

  • Appendix G

    Economic Effects Model

  • Appendix H

    Survey Instrument

This research was sponsored by the New York City Mayor's Office of Recovery and Resiliency and conducted by the RAND Institute for Civil Justice (ICJ) within RAND Justice, Infrastructure, and Environment.

This report is part of the RAND Corporation research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

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