Stopping the flow 63
of policies violate actuarial fairness, this provision was adopted with ‘public goals in mind, namely maintaining participation in the program and a
perception of fairness on the part of homeowners in response to updated
mapping’ (Kousky & Shabman 2014, p. 8). The idea was that it was only
fair that the program not penalise property owners who had, in a sense,
played by the rules, by building to code and maintaining coverage, because
the world had changed around them and the maps had been updated to
reflect that. The grandfathering discounts are offset by other policyholders
in the zone, who pay higher rates (Horn 2021), with the NFIP increasing
the cross-subsidy from non-grandfathered policyholders to account for the
lost revenue (Committee on the Affordability of National Flood Insurance
Program Premiums 2015). For decades, these two ideas of what fairness
requires have uneasily co-existed in the NFIP. Risk Rating 2.0 seems to
eliminate this longstanding tension in one fell swoop. If map updates (which
will still take place to inform flood risk management) indeed have no bearing on setting premiums, then there is no zone change that needs to be offset
through grandfathering and a cross-subsidy.
Risk Rating 2.0 also promises another variety of ‘equity’ will be realised
through this technical transformation. It will correct a flow that had the
affluent paying too little, and ordinary people paying too much, by including the cost to rebuild in insurance rating. Under the current system, NFIP
rates are set based on the dollar value of coverage and are not adjusted for
the value of a home. What this means, for example, is that ‘a $2 million dollar home may suffer $200,000 of loss more frequently than will a $200,000
home (for which it would be a total loss) but pay the same for coverage.
Similarly, a flood that damages 10 percent of a building would cause more
absolute damage for the higher value home, but again pricing is the same’
(Kousky 2018, p. 25). In addition, the NFIP charges higher rates for coverage under a fixed dollar value, making insurance more expensive for lower
valued homes that need less coverage.
In foregrounding the correction of this flow, FEMA is anticipating a common objection about the distributional effects of premium increases – and
Risk Rating 2.0 is anticipated to increase premiums for most policyholders –
namely, that policyholders’ ability to absorb a price increase varies tremendously. For some, flood insurance increases mean their second vacation
home on the beach becomes more expensive. For others, those increases
put them in danger of not being able to maintain the mortgage on their
only home. The objection that a shift to actuarial rates compounds existing socio-economic inequalities has led Congress to backtrack on earlier
rounds of NFIP reform (Elliott 2017). Here again, Risk Rating 2.0 offers a
technical way out of a persistent dilemma. If the algorithm can be tweaked,
fine-tuned to take into consideration not only the risks people face, but also
what they have of (financial) value, then the program can in a sense now
‘see’ these meaningful differences between policyholders and treat them
accordingly.
of policies violate actuarial fairness, this provision was adopted with ‘public goals in mind, namely maintaining participation in the program and a
perception of fairness on the part of homeowners in response to updated
mapping’ (Kousky & Shabman 2014, p. 8). The idea was that it was only
fair that the program not penalise property owners who had, in a sense,
played by the rules, by building to code and maintaining coverage, because
the world had changed around them and the maps had been updated to
reflect that. The grandfathering discounts are offset by other policyholders
in the zone, who pay higher rates (Horn 2021), with the NFIP increasing
the cross-subsidy from non-grandfathered policyholders to account for the
lost revenue (Committee on the Affordability of National Flood Insurance
Program Premiums 2015). For decades, these two ideas of what fairness
requires have uneasily co-existed in the NFIP. Risk Rating 2.0 seems to
eliminate this longstanding tension in one fell swoop. If map updates (which
will still take place to inform flood risk management) indeed have no bearing on setting premiums, then there is no zone change that needs to be offset
through grandfathering and a cross-subsidy.
Risk Rating 2.0 also promises another variety of ‘equity’ will be realised
through this technical transformation. It will correct a flow that had the
affluent paying too little, and ordinary people paying too much, by including the cost to rebuild in insurance rating. Under the current system, NFIP
rates are set based on the dollar value of coverage and are not adjusted for
the value of a home. What this means, for example, is that ‘a $2 million dollar home may suffer $200,000 of loss more frequently than will a $200,000
home (for which it would be a total loss) but pay the same for coverage.
Similarly, a flood that damages 10 percent of a building would cause more
absolute damage for the higher value home, but again pricing is the same’
(Kousky 2018, p. 25). In addition, the NFIP charges higher rates for coverage under a fixed dollar value, making insurance more expensive for lower
valued homes that need less coverage.
In foregrounding the correction of this flow, FEMA is anticipating a common objection about the distributional effects of premium increases – and
Risk Rating 2.0 is anticipated to increase premiums for most policyholders –
namely, that policyholders’ ability to absorb a price increase varies tremendously. For some, flood insurance increases mean their second vacation
home on the beach becomes more expensive. For others, those increases
put them in danger of not being able to maintain the mortgage on their
only home. The objection that a shift to actuarial rates compounds existing socio-economic inequalities has led Congress to backtrack on earlier
rounds of NFIP reform (Elliott 2017). Here again, Risk Rating 2.0 offers a
technical way out of a persistent dilemma. If the algorithm can be tweaked,
fine-tuned to take into consideration not only the risks people face, but also
what they have of (financial) value, then the program can in a sense now
‘see’ these meaningful differences between policyholders and treat them
accordingly.