Financing Risk Reduction

1. Financing Risk Reduction Session 17 Slide Deck Session 17

2. Objectives 17.1 Examine the Role of Insurance Coverage in Financing Risk Reduction 17.2 Examine FEMA Mitigation Grant Programs 17.3 Examine Examples of Local Funding Options Session 17

3. Insurance “A promise of compensation for specific potential future losses in exchange for a periodic payment” Source: InvestorWords.com, 2003 Session 17

4. Deductibles • Fixed Amount – e.g., $1000 per event • Percentage of Total Loss – e.g., %5 of the total loss. • Combination deductible– e.g., Insured pays the first $500, and 5% of all costs thereafter. Session 17

5. How Insurance Works • Losses to be shared across wide populations • Takes into account all of the policy-holders • Cost of compensating policy holders for all accidents • Divides that cost • Specific definition of risk to individuals • Invest premiums Session 17

6. Most property owners and renters in the United States have some form of insurance that protects either the structure itself, the contents of the structure, or both. However, this coverage is often limited, with specific preclusions against certain natural and technological disasters. Session 17

7. Policies for specific catastrophic hazards can be purchased separately from basic insurance homeowners’ or renters’ policies, or as riders to these policies Session 17

8. Adverse Selection Only those people who are likely to suffer the specific loss defined in the policy are likely to purchase that type of policy, creating the need for much higher premiums than if the specific hazard policy were spread across a more general population Session 17

9. Methods adopted to address the problems associated with adverse selection • The inclusion of these disasters in basic/comprehensive homeowner and renters’ policies, regardless of exposure or vulnerability. • The introduction of government backing on insurance coverage of catastrophic events. • Heavier reliance on international reinsurance companies. Session 17

10. Advantages gained through the use of insurance • Victims are guaranteed a secure and predictable amount of compensation for their losses • Losses are distributed in an equitable fashion, protecting many for only a fraction of the cost each would have individually incur if exposed to hazards • Insurance can actually reduce hazard impact by encouraging policy holders to adopt certain required mitigation measures Session 17

11. Limitations on Hazard Insurance • Insurance can be unavailable in high risk areas. • Participation in insurance plans is voluntary. • Participation has been known to encourage irresponsible behavior. • Many companies are pulling out of specific disaster insurance plans. • Catastrophic losses can cause inequitable premium increases. • Some see insurance as redistributing losses rather than actually eliminating exposure to the hazard. Session 17

12. NFIP – Five Major Goals • Improve basic knowledge about flood hazards • Coordinate and plan new developments in the floodplain • Provide technical services • Move toward a practical national program of flood insurance • Adjust Federal flood control policy to sound criteria and changing needs Session 17

13. Flood Disaster Protection Act of 1973 prohibits Federal agencies from providing financial assistance for acquisition or construction of buildings and certain disaster assistance in the floodplains in any community that did not participate in the NFIP by July 1,1975, or within 1 year of being identified as flood-prone Session 17

14. Flood Disaster Protection Act of 1973 Federal agencies and federally insured or regulated lenders had to require flood insurance on all grants and loans for acquisition or construction of buildings in designated Special Flood Hazard Areas (SFHAs) in communities that participate in the NFIP Session 17

15. National Flood Insurance Reform Act (NFIRA) • Increased compliance by mortgage lenders • Increased the amount of flood insurance coverage that can be purchased. • Provided flood insurance coverage for the cost of complying with floodplain management regulations. • Established a Flood Mitigation Assistance grant program. • Codified the NFIP’s Community Rating System • Require FEMA to assess its flood hazard map inventory at least once every 5 years Session 17

16. Three Components of the NFIP • Identifying and mapping flood-prone communities. • Enforcing the requirement that communities adopt and enforce floodplain management regulations. • The provision of flood insurance. Session 17

17. Terrorism Risk Insurance • First $5 million in losses from any single event is paid by insurers. • If losses amount from $5 million to $100 billion, the insurer pays a deductible. • If losses exceed $100 billion, neither the government nor the insurers is liable for payment beyond the initial $100 billion. Session 17

18. Risk Sharing Pools Associations of public entities with similar functions that have banded together to share risks by creating their own insurance vehicles Session 17

19. FEMA HMA “FEMA's Hazard Mitigation Assistance (HMA) grant programs provide funding for eligible mitigation activities that reduce disaster losses and protect life and property from future disaster damages.” Session 17

20. HMA grant programs • Hazard Mitigation Grant Program (HMGP) • Pre-Disaster Mitigation (PDM) • Flood Mitigation Assistance (FMA) • Repetitive Loss Claims (RLC) • Severe Repetitive Loss (SRL) Session 17

21. Hazard Mitigation Grant Program “The Hazard Mitigation Grant Program (HMGP) provides grants to states and local governments to implement long-term hazard mitigation measures after a major disaster declaration.” Session 17

22. What Types Of Projects Can Be Funded By The Hazard Mitigation Grant Program? • Reduce or eliminate the losses from future disasters. • Potential savings must be more than the cost. • Protect either public or private property or to purchase property that has been subjected to, or is in danger of, repetitive damage. Session 17

23. Examples of HMGP Projects • Acquisition of real property • Retrofitting structures and facilities • Elevation of flood prone structures • Vegetative management programs • Minor flood control projects • Localized flood control projects • Post-disaster building code related activities Session 17

24. Who is Eligible to Applyfor HMGP Funds • State and local governments. • Indian tribes or other tribal organizations. • Certain non-profit organizations. • Individual homeowners and businesses may not apply directly to the program; however a community may apply on their behalf Session 17

25. How to apply for the Hazard Mitigation Grant Program • State will advertise that Hazard Mitigation Grant Program • Contact their local government • Local governments should contact their State Hazard Mitigation Officer Session 17

26. HMGP Funding • FEMA provides 15 percent of the total disaster grants awarded by FEMA • FEMA can fund up to 75 percent of the eligible costs • State or grantee must provide a 25 percent match • Funding provided to states under the CBDG program from HUD can be used to meet the non-federal share requirement Session 17

27. Minimum Project Criteria • Does your project conform to your State's Hazard Mitigation Plan? • Does your project provide a beneficial impact on the disaster area, i.e. the State? •  Does your application meet the environmental requirements? •  Does your project solve a problem independently? •  Is your project cost-effective?” Session 17

28. How are potential projects selected and identified • Meet certain minimum criteria • Most cost-effective and appropriate projects are selected for funding • State prioritizes and selects project applications • FEMA eligibility review Session 17

29. Pre-Disaster Mitigation (PDM) “The Pre-Disaster Mitigation (PDM) program provides funds to states, territories, Indian tribal governments, communities, and universities for hazard mitigation planning and the implementation of mitigation projects prior to a disaster event.” Session 17

30. PDM Eligible Projects • Property Acquisition and Structure Demolition • Property Acquisition and Structure Relocation • Structure Elevation • Mitigation Reconstruction • Dry Floodproofing of Historic Residential Structures • Dry Floodproofing of Non-residential Structures • Minor Localized Flood Reduction Projects • Structural Retrofitting of Existing Buildings Session 17

31. PDM Eligible Projects • Non-structural Retrofitting of Existing Buildings and Facilities • Safe Room Construction • Infrastructure Retrofit • Soil Stabilization • Wildfire Mitigation • Hazard Mitigation Planning • Management Costs Session 17

32. Flood Mitigation Assistance (FMA) “The Flood Mitigation Assistance (FMA) program was created as part of the National Flood Insurance Reform Act (NFIRA) of 1994 (42 U.S.C. 4101) with the goal of reducing or eliminating claims under the National Flood Insurance Program (NFIP).” Session 31

33. FMA Eligible Projects • Property Acquisition and Structure Demolition • Property Acquisition and Structure Relocation • Structure Elevation • Mitigation Reconstruction • Dry Floodproofing of Historic Residential Structures • Dry Floodproofing of Non-residential Structures • Minor Localized Flood Reduction Projects • Hazard Mitigation Planning • Management Costs Session 17

34. FMA Grant Types • Planning Grants • Project Grants • Management Cost Grants Session 17

35. Repetitive Flood Claims (RFC)  “The Repetitive Flood Claims (RFC) grant program provides up to $10 million is available annually for the Federal Emergency Management Agency (FEMA) to provide RFC funds to assist states and communities reduce flood damages to insured properties that have had one or more claims to the NFIP.” Session 17

36. RFC Eligible Projects • Property Acquisition and Structure Demolition • Property Acquisition and Structure Relocation • Structure Elevation • Dry Floodproofing of Historic Residential Structures • Dry Floodproofing of Non-residential Structures • Minor Localized Flood Reduction Projects • Management Costs Session 17

37. Severe Repetitive Loss (SRL) “The Severe Repetitive Loss (SRL) grant program provides funding to reduce or eliminate the long-term risk of flood damage to severe repetitive loss structures insured under the National Flood Insurance Program.” Session 17

38. SRL Eligible Projects • Property Acquisition and Structure Demolition • Property Acquisition and Structure Relocation • Structure Elevation • Mitigation Reconstruction • Dry Floodproofing of Historic Residential Structures • Minor Localized Flood Reduction Projects • Management Costs Session 17

39. Factors for Probability of Implementation • Political Support • Public Support • Support of Business Community • Support from Community and Non-Profits Groups • Cost • Short-term versus Long-term benefits Session 17

40. Factors for Funding and Leveraging of Resources • Local funding source • State funding sources • Federal funding sources • Private sector and Foundations • Leveraging resources Session 17