Flood Risk and Insurance

Premiums in Pensacola, Florida

Howard Kunreuther James G. Dinan Professor of Decision Sciences & Public Policy

Operations, Information and Decisions (OID) Dept. Co-Director, Risk Management and Decision Processes Center

Wharton School, University of Pennsylvania

Marilyn Montgomery, PhD, GISP (presenting author) Postdoctoral Research Fellow

Risk Management and Decision Processes Center Wharton School, University of Pennsylvania

Rationale for this study

u  Flood risk assessment: analyze flood hazard maps that are more granular than the Special Flood Hazard Areas (SFHAs) of FEMA DFIRMs

u  To understand NFIP rate-setting: u  Estimate NFIP premiums given the available data and NFIP

manual

u  Implications of risk-based insurance rates u  Compare NFIP estimated premiums with risk-based premiums

based on alternative flood hazard maps

u  Lay the groundwork for subsequent 2 tasks/reports u  First/current report is on risk assessment u  2nd: Risk-based premiums

u  3rd: Affordability and mitigation

Presentation outline

1.  Study Area: Pensacola/Escambia County, FL

2.  Data

3.  Methodology:

1.  NFIP premiums for homes in Escambia County are estimated.

2.  Risk-based premiums based on storm surge hazards are estimated.

4.  Illustrative examples

5.  Results:

1.  Estimated NFIP premiums are presented and compared with surge risk-based premiums.

6.  Discussion

7.  Conclusions & Recommendations

8.  Future research

Pensacola, Florida u  Flood-prone: 16.6% of all NFIP claims in Florida are from

Escambia County, FL (although it only has 1.6% of Florida population)

u  Local buy-in of research project

Estimating NFIP premiums for homes in Escambia County

1.  Gathered data needed to assess exposure 1.  Parcel data from Escambia County Property Appraiser

(2015)

1.  Occupancy type (residential detached/single-family homes), building values, date of construction, foundation types, number of floors

2.  Building footprints

3.  Lidar-derived elevation data

2.  NFIP effective DFIRM

3.  NFIP manual (most recent version October 2016)

Alternative flood hazard maps

1.  Risk MAP products for Escambia County will be released April – June 2017

1.  Will include flood elevation data for the 10%, 4%, 2%, 1% and 0.2% annual chance events

2.  More granular than SFHAs (1% annual chance zones)

3.  Assessed in Reports 2 and 3

2.  Storm surge hazard products from U-Surge 1.  More granular than FEMA DFIRMs: includes surge

elevations for the 10%, 4%, 2%, 1% and 0.2% annual chance events based on historical data for Pensacola since 1900

2.  Methodology to derive U-Surge data is relatively transparent and not subject to the DFIRM map adoption process

3.  Includes future surge risks with sea level rise

U-Surge data: 2017

Return periods/ surge heights for Pensacola: 500-Year Level: 20.21’ 100-Year Level: 13.92’ 50-Year Level: 11.21’ 25-Year Level: 8.50’ 10-Year Level: 4.91’

U-Surge future conditions

Year Linear Low_Ex Med_Ex High_Ex

2017 0.0 0.0 0.0 0.0

2042 0.19 0.25 0.29 0.33

2067 0.38 0.62 0.78 0.95

2092 0.56 1.11 1.46 1.86

2117 0.75 1.73 2.35 3.06

Methodology: estimating NFIP premiums

1.  Compile parcel data with fields required to assess flood risk and estimate NFIP premiums

2.  Intersect building footprints with effective DFIRM flood zones including BFEs where given

3.  X zone premiums are easy to estimate

4.  AE zones 1.  Pre-FIRM (based on year of construction): no elevation

data needed

2.  Post-FIRM homes need first floor elevations (FFE): slab on-grade homes FFEs are assumed same as lidar ground elevation

3.  Geocode elevation certificates obtained from local NFIP managers

Methodology: estimating NFIP premiums (cntd.)

5.  VE zones: very difficult/impossible to estimate without elevation certificate

5.  E.g., must know the type of walls/structure under pilings: breakaway or not

6.  After obtaining all the data, we estimated premiums for

5.  All X zone single-family homes

6.  All pre-FIRM A zones homes (include A, AE, AO, AH)

7.  Post-FIRM A and V zone homes with slab on-grade foundations

8.  Homes with geocoded elevation certificates

7.  Pure premiums were estimated, with/without CRS discounts

U-Surge data

u  Storm surge hazard maps (surge elevations) with given probabilities

u  10%, 4%, 2%, 1% and 0.2% annual chance events

u  For present day surge hazards (2017), and future given sea level rise projections: 2042, 2067, 2092, and 2117

u  Flood elevation data were intersected with homes (slab foundations and geocoded elevation certificates)

u  Pure premiums based on surge risk were computed for now and the future years

Assumptions for estimating NFIP premiums

u  Building coverage = building value (according to property appraiser’s data)

u  Contents coverage = 50% of building value

u  Applied coverage NFIP limits

u  In reality, policy holders report their own coverage amounts

u  No fees or surcharges

u  Only accounted for CRS discounts with pure premium

u  Pre-/post-FIRM rates based on year of home construction in relation to year of community entering NFIP

u  Based on geospatial analyses, homes are rated according to the effective (2006) flood zone they occur within u  No grandfathering

Assumptions for estimating NFIP premiums (cntd.)

u  FFE of slab on-grade homes = minimum ground elevation within building footprint

u  No consideration of deductibles/deductible factors u  Factor of 1 = $1000/$1000 building/contents deductible but

only if building coverage is $100K or less

u  Homestead exemption = building and contents coverage, while homes without homestead exemption only purchase contents coverage

Estimating risk-based premiums

u  Surge hazards, not composite flood hazards (including precip)

u  Average annual expected losses

Illustrative example 1: NFIP u  post-FIRM AE zone single-family home, one floor,

with elevation certificate showing FFE is1 foot above BFE.

u  Bldg value = $80,000, contents value = $40,000; coverage is for full replacement values

u  Annual rates per $100 of coverage for building (basic/additional): .88/.12

u  Contents (basic/additional): .49 / .12

u  Building premium = (.88 * 60,000 / 100) + (.12 * 20,000 / 100) = $552

u  Contents premium = (.49 * 25,000 / 100) + (.12 * 15,000 / 100) = $141

u  Total annual premium (building + contents) = $693

Illustrative example 2: NFIP u  post-FIRM AE zone single-family home, one floor,

with elevation certificate showing FFE is1 foot below BFE.

u  Bldg value = $80,000, contents value = $40,000; coverage is for full replacement values

u  Annual rates per $100 of coverage for building (basic/additional): 5.28/.25

u  Contents (basic/additional): 1.39 / .45

u  Building premium = (5.28* 60,000 / 100) + (.25 * 20,000 / 100) = $3,218

u  Contents premium = (1.39* 25,000 / 100) + (.45 * 15,000 / 100) = $415

u  Total annual premium (building + contents) = $3,633

Illustrative example 3: AAL based on surge risks u  Single-family home with one floor, inundation depths for

surge hazards are -12’ for 10%, 4%, and 2% annual chance events, 1’ for the 1% annual chance surge, and 8’ for the 0.2% annual chance surge.

u  Bldg/contents coverage = $80,000/ $40,000

u  USACE IWR function: 1’/1% annual chance flood: 0.23/0.26 bldg/contents damage; 8’/.02% flood, 0.67/0.72 bldg/contents damage

u  AAL_bldg = (0.02 – 0.01) * ((0 + 0.23)/2) +

(0.01 – 0.002) * ((0.23 + 0.67)/2) +

(0.002 * 0.67) = 0.00609 * $80K = $487

u  AAL_cont = (0.02 – 0.01) * ((0 + 0.26)/2) +

(0.01 – 0.002) * ((0.26 + 0.72)/2) +

(0.002 * 0.72) = 0.00666 * $40K = $266

Total AAL surge = $754

Illustrative example 4: NFIP u  post-FIRM X zone home, single floor. u  Bldg value = $80,000, contents value = $40,000;

coverage is for full replacement values u  Annual rates per $100 of coverage for building (basic/

additional): 1.05/.29

u  Contents (basic/additional): 1.61/.51

u  Building premium = (1.05* 60,000 / 100) + (.29 * 20,000 / 100) = $688

u  Contents premium = (1.61 * 25,000 / 100) + (.51 * 15,000 / 100) = $479

u  Total annual premium (building + contents) = $1,167

Examples compared

1.  NFIP total $693; premium per $100 coverage = 0.577 1.  post-FIRM AE zone home with FFE 1’ > BFE

2.  NFIP total $3,633; premium per $100 coverage = 3.028

1.  post-FIRM AE zone home with FFE 1’ < BFE

3.  AAL surge risk-based premium $754; premium per $100 coverage = 0.628

1.  Flood zone doesn’t matter, but FFE < 1’ 1% annual chance flood elevation

4.  NFIP total $1,167; premium per $100 coverage = 0.973 1.  X zone home

Results

u  NFIP estimated premiums pre/post-FIRM for buildings and contents u  Total pure premiums only

u  Compare normalized NFIP premiums with surge risk-based premiums based on 2 different depth-damage functions in Hazus (FIA and USACE IWR) u  Pre/post-FIRM, with/without CRS discounts

u  Premiums per $100 total coverage

u  Surge risk for 2017 and 25, 50, 75, and 100 years into the future with sea level rise

u  For slab homes and those with geocoded elevation certificates

Results: NFIP pure premiums for buildings (X zones & slab homes)

Mean estimated NFIP building premiums for owner-occupied homes (n = 54,239)

Mean estimated contents premiums for renter- and owner-occupied homes (n = 77,834)

Results: NFIP pure premiums for contents (X zones & slab homes)

Results: building values & NFIP premiums (elevation cert’s)

N=96 homes with geocoded elevation certificates Assumed owner-occupied, post-FIRM

Results: NFIP premiums normalized (elevation cert’s)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

NFIP NFIP with CRS discount

Mean pure premiums per $100 coverage: homes with elevation certificates (n=96)

AE VE

Results: NFIP and surge risk-based normalized premiums

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

prem

ium

s pe

r $10

0 co

vera

ge

Mean estimated premiums per $100 coverage: slab on-grade foundation homes (n=2,352)

Results: NFIP and surge risk-based normalized premiums

0.00

0.50

1.00

1.50

2.00

2.50

prem

ium

s pe

r $10

0 co

vera

ge

Mean estimated premiums per $100 coverage: geocoded elevation certificates (n=37)

Discussion

u  X zone premiums are relatively high u  Very close to pre-FIRM A zones rates

u  VE zone homes (elevation certificates) do not have very high premiums u  Built very recently with at least 3 feet freeboard

u  Estimating NFIP premiums more difficult than anticipated u  Without knowing chosen coverages, subsidies, and fees;

pure premiums are estimated based on full building & contents replacement values

u  Surge risk should be lower than composite flood risk but demonstrates the AAL method of risk-based premiums estimates u  Computing risk-based insurance premiums is easier & more

transparent than NFIP

Conclusions & Recommendations

u  NFIP rates should be based on a percentage of total insured value, not different rates for basic and additional coverage. u  Basic/additional rates are inequitable for those insuring

moderately-priced homes/contents since basic rates are much higher than additional.

u  Pre-FIRM rates should be risk-based. u  Post-FIRM rates based on home elevation data could be

lower than pre-FIRM.

u  Homeowners should get elevation certificates.

u  More accurate risk-based insurance rating and promotes understanding of flood risk.

Conclusions & Recommendations (cntd.)

u  NFIP should determine risk-based premium rates for houses outside SFHAs that account for home elevation.

u  Discounts for elevated homes in X zones could be offered even without knowing the extent and elevation of the 0.2% annual chance event flood

u  Differentiate homes with more than 1 floor from those with one floor in all flood zones and all premium rates.

u  More of a risk-based approach

u  Currently number of floors is only accounted for in post-FIRM A and V zones rating

u  CRS discounts should be the same for non-SFHA property as it is for those within SHFAs. u  Encourage more policies outside SFHAs

Future Research

u  Analysis of composite flood risk data (Risk MAP products) in April – June

u  More granular than SFHAs in DFIRMs

u  Not subject to map adoption process

u  Sensitivity analysis of more depth-damage functions used in risk-based AAL premium estimations u  also test variations in FFE, number of floors, number of

input flood elevation/frequencies

u  Comparison of estimated NFIP premiums with actual NFIP database

u  Assess insurance NFIP penetration and characterize uninsured

Future Research (cntd.)

u  Which and how many homes are vulnerable to the most frequent floods and can they be cost-effectively mitigated u  What homes are vulnerable to 10% or 4% annual chance

events, and can they be elevated?

u  Affordability implications of risk-based premiums and estimated NFIP premiums u  What neighborhoods may be financially burdened by flood

insurance

u  Develop criteria for homeowners who could qualify for a voucher or low-interest loan to assist with risk-based premium costs, and for mitigating their home against flood risks.

u  Long Hollow and Sanders Beach tracts will be further investigated. Field visits will made to estimate home elevations by visual inspection and/or conversations with homeowners.

Thank you for your time & attention.