The Cost and Affordability of Flood Insurance in New York City

226 Pages·2017·8.95 MB·English

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
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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Preface
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 commu-
nities. It also develops and evaluates several different approaches for assisting house-
holds 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 insur-
ance in New York City, Flood Insurance in New York City Following Hurricane Sandy
(Dixon et al., 2013).
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 and draws on two workshops convened by the
National Academies of Sciences, Engineering, and Medicine on behalf of FEMA’s Fed-
eral Insurance and Mitigation Administration (FIMA) to help FIMA explore options
for a flood insurance affordability program.
The authors of this report are from a number of different organizations that col-
laborated to complete this report. Lloyd Dixon, Noreen Clancy, and Ben Miller are at
RAND; Scott Choquette, Samara Ebinger, and Sue Hoegberg are at Dewberry Engi-
neers, Inc.; Michael Lewis is at Gayron de Bruin Land Surveying and Engineering PC;
Caroline Nagy and Kevin Wolf are at the Center for New York City Neighborhoods;
Mel Hodges and Gayle Syck are at Torrent Technologies, Inc.; and Bruce Bender is at
Bender Consulting Services.
This research was sponsored by the New York City Mayor’s Office of Recovery
and Resiliency.
iii
iv The Cost and Affordability of Flood Insurance in New York City
The RAND Center for Catastrophic Risk Management and
Compensation
The RAND Center for Catastrophic Risk Management and Compensation seeks to
identify and promote laws, programs, and institutions that reduce the adverse social
and economic effects of natural and human-caused catastrophes by improving incen-
tives to reduce future losses; providing just compensation to those suffering losses
while appropriately allocating liability to responsible parties; helping affected individu-
als, businesses, and communities to recover quickly; and avoiding unnecessary legal,
administrative, and other transaction costs.
Questions or comments about this report should be sent to the project leader,
Lloyd Dixon ([email protected]). For more information about the RAND
Center for Catastrophic Risk Management and Compensation, see www.rand.org/jie/
justice-policy/centers/catastrophic-risk-management or contact the director at ccrmc@
rand.org.
Contents
Preface ................................................................................................. iii
Figures ................................................................................................. ix
Tables .................................................................................................. xi
Summary ..............................................................................................xv
Acknowledgments ................................................................................xxvii
Abbreviations .......................................................................................xxix
CHAPTER ONE
Introduction ........................................................................................... 1
Purpose of This Study ................................................................................. 2
Study Approach ........................................................................................ 2
Organization of This Report .......................................................................... 5
CHAPTER TWO
The Affordability of Flood Insurance in New York City ...................................... 7
One- to Four-Family Properties in the Study Area ................................................ 7
Households That Live in the Owner-Occupied One- to Four-Family
Structures in the Study Area ....................................................................10
Household Size, Age, Race, Ethnicity ............................................................10
Household Income ..................................................................................13
Flood Insurance Take-Up Rates .....................................................................15
Amount of Flood Insurance Coverage ..............................................................19
Affordability of Flood Insurance ....................................................................21
Flood Insurance Premiums ........................................................................21
Housing Burden.................................................................................... 23
Summary of Key Findings ...........................................................................29
CHAPTER THREE
Flood Insurance Premium Scenarios ............................................................31
Approach ...............................................................................................32
Example Premium Calculations ..................................................................35
v
vi The Cost and Affordability of Flood Insurance in New York City
Premiums Using the 2007 Flood Insurance Rate Map .......................................... 36
Comparison Between Scenario B Premiums and Premiums Paid by
Policyholders in 2016 ......................................................................... 40
Premiums Using the Preliminary Flood Insurance Rate Map ...................................41
Premiums for Properties Already in High-Risk Zones ........................................ 43
Premiums for Newly Mapped Properties ....................................................... 46
Housing Burden Under Different Premium Scenarios .......................................... 50
Summary of Key Findings ...........................................................................51
CHAPTER FOUR
Flood Insurance Affordability in Five Vulnerable Subareas ................................53
Subarea Risk Profiles ................................................................................ 54
Canarsie ............................................................................................. 54
Gerritsen Beach and Sheepshead Bay.............................................................58
Jamaica Bay Subarea ...............................................................................62
Rockaway Peninsula ............................................................................... 64
East Shore Subarea ................................................................................. 66
Take-Up Rates and Housing Burden ...............................................................67
Premium Scenarios by Study Subarea ..............................................................69
Summary of Findings.................................................................................74
CHAPTER FIVE
Effects of Flood Insurance Premium Increases on
Households and Neighborhoods ........................................................... 77
Introduction .......................................................................................... 77
Effect of Flood Insurance Premium Increase on Property Values ...............................78
Effect of Flood Insurance Premium Increase on Property Tax Revenue .......................82
Effect of Flood Insurance Premium Increase on Probability of Default ........................83
Effect of Flood Insurance Premium Increase on Probability of
Insurance Take-Up Rates ...................................................................... 84
Summary of Findings................................................................................ 86
CHAPTER SIX
Flood Insurance Affordability Program Options ............................................. 87
Approach .............................................................................................. 87
Design 1: Income-Based Subsidy ................................................................... 90
Design 2: Subsidy Based on Housing Burden .................................................... 97
Design 3: Deductible Subsidy ..................................................................... 101
Design 4: Mitigation Grants and Low-Interest Loans .......................................... 104
Approach ........................................................................................... 106
Mitigation Options and Their Costs ........................................................... 107
Program Outcomes ............................................................................... 109
Contents vii
Design 5: Income-Based Subsidy with Mitigation Grants and Loans ........................ 113
Summary of Findings............................................................................... 114
CHAPTER SEVEN
Conclusion .......................................................................................... 119
To What Extent Is Purchasing Flood Insurance Burdensome for Households
Living in One- to Four-Family Homes in the Study Area? ............................... 119
How Might Flood Insurance Premiums Change in the Study Area? ......................... 119
What Effect Will Flood Insurance Premium Increases Have on
Households and Communities in the Study Area? ......................................... 120
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? ............................................................... 121
APPENDIXES
A. Survey Methods ................................................................................ 123
B. Development of the Project Geodatabase .................................................. 139
C. AMI-Based Income Categories and the Correlation Between
Household Income and Net Worth ........................................................ 147
D. Components of Housing Costs and Relationship Between Amount of
Flood Coverage, Structure Replacement Cost, and Mortgage Balance ............ 151
E. Flood Insurance Premium Model ........................................................... 159
F. Eligibility Requirements for Pre-FIRM and Grandfathered Rates ................... 169
G. Economic Effects Model ...................................................................... 173
H. Survey Instrument ............................................................................. 179
References ........................................................................................... 191

Figures
S.1. Study Area ............................................................................... xvi
1.1. Study Area ................................................................................. 3
1.2. Number of One- to Four-Family Properties in the Study Sample .................. 4
2.1. Difference Between Structure Elevation and 2007 BFE for Structures
in the High-Risk Zones of the 2007 FIRM ..........................................11
2.2. Building and Contents Coverage for Policies in Force as of June 2016 ...........19
2.3. Building Coverage and Replacement Cost for Policies in Force
as of December 31, 2014 ............................................................... 20
2.4. Relationship Between PITI Ratio and Household Income ........................ 26
2.5. PITI Ratios in the Study Area, Owner-Occupied Residences Only .............. 28
3.1. Building and Contents Coverage Assumed in the Premium Scenarios ...........35
3.2. Flood Insurance Premium Projections Using the 2007 FIRM
for Properties in Study Area ............................................................39
3.3. Change in BFE Under PFIRM Versus 2007 FIRM for Properties in
High-Risk Zones of the 2007 FIRM ................................................. 42
3.4. Difference Between Structure Elevation and PFIRM BFE in the Study Area .. 43
3.5. Premium Projections Using the PFIRM for Properties in the
High-Risk Zones of the 2007 FIRM ................................................ 44
3.6. Premium Increases for Properties in the High-Risk Zones
of the 2007 FIRM ......................................................................45
3.7. Premium Projections Using the PFIRM for Newly Mapped Properties ..........47
3.8. Premium Increases for Newly Mapped Properties .................................. 48
4.1. Study Subareas in Brooklyn and Queens .............................................55
4.2. Study Subarea on Staten Island ....................................................... 56
4.3. Attached Home in Canarsie with a Residential Unit on the Ground Floor ......57
4.4. Typical Row Houses in Canarsie ......................................................58
4.5. First Floor Below Street Level in Gerritsen Beach ...................................59
4.6. Narrow Streets and Small Shallow Lots in Gerritsen Beach....................... 60
4.7. Bungalows in Below-Grade Courts in Sheepshead Bay ............................ 60
4.8. Typical Detached Bungalow in Sheepshead Bay .....................................61
4.9. Flooded Street in Broad Channel During a Super Moon High Tide .............62
4.10. Detached House in Old Howard Beach ..............................................63
4.11. Semidetached Homes in Hamilton Beach ........................................... 64
ix
x The Cost and Affordability of Flood Insurance in New York City
4.12. Bungalows in the Foreground and High-Rise Buildings in the
Background on the Rockaway Peninsula .............................................65
4.13. Typical Bungalow on the East Shore ..................................................67
4.14. PITI Ratio for Households Participating in the Study as of 2016 .................69
4.15. Premium Scenario B Projections by Study Subarea (2007 FIRM,
2015 NFIP Price Schedule, with Pre-FIRM Rates) ..................................70
4.16. Premium Scenario G Projections by Study Subarea (PFIRM, 2015 NFIP
Price Schedule, Without Pre-FIRM Rates or Grandfathering) ....................71
4.17. Flood Insurance Premium in Premium Scenario B .................................73
4.18. Flood Insurance Premium in Premium Scenario G .................................73
4.19. PITI Ratio Assuming Premium Scenario G ..........................................74
5.1. Total Change in Spending on Flood Insurance by One- to
Four-Family Households in High-Risk Zones of the Preliminary
Flood Insurance Rate Map .............................................................82
6.1. Structure for Income-Based Subsidy ..................................................91
6.2. Alternative Versions of the Income-Based Subsidy Design .........................95
6.3. Homeowners Eligible for Housing Burden–Based Subsidy Program ............ 97
6.4. Subsidy Structure for Housing Burden–Based Subsidy Program ................. 98
6.5. Subsidy Structure for Deductible Subsidy .......................................... 103
A.1. Invitation Letter to Participants ...................................................... 128
A.2. Last-Chance Letter .................................................................... 131
A.3. Flood Insurance Fact Sheet Provided to Study Participants ...................... 133
D.1. Expenditure on Utilities and Insurance by Household AMI ..................... 154
H.1. Survey Instrument ..................................................................... 180