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Community-Based Flood Insurance: Would It Work in New Jersey?

One potential fatal flaw: Homeowners at low risk could end up subsidizing neighbors in high-risk zones

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In the search for ways of defending coastal communities from rising seas and future mega-storms, community-based flood insurance could persuade more people to get coverage and improve flood mitigation, but it’s not clear that it would work in New Jersey.

In a new research paper, the National Academies of Science described a system that would provide a single policy under the National Flood Insurance Program for residents of flood-prone communities as a way of getting more people covered and motivating individuals and local governments to get serious about resiliency.

The academy, in a research project ordered by the Federal Emergency Management Agency, said that a shared insurance policy in vulnerable communities could help address longstanding problems of low participation and new or existing development that’s exposed to rising tides and storms.

But municipalities are probably not equipped to manage such a system, and could be open to charges that residents with less exposure are helping to pay the premiums of those with more-exposed properties, New Jersey experts said.

David Kutner, recovery planning manager for New Jersey Future, argued that assessing risk and setting insurance premiums are beyond the capacity of most municipalities. He said the problem is compounded in New Jersey as a “home rule” state, which means that any common insurance policy would be the responsibility of the local government, rather than the county or the state, to administer.

Kutner said that any program that increases communities’ preparedness for storms and floods is welcome but that the community-insurance idea, as described by NAS, is problematic.

“These are issues that are much bigger than any municipality,” he said. “The idea of making municipalities responsible for insuring the residents in their community just reinforces this balkanized approach to dealing with these issues.”

Randall Solomon, co-director of Sustainable Jersey, predicted that any common insurance policy would be open to claims that some community members would be subsidizing the insurance premiums of others.

“The main issue is that you are asking members of a community whose property is at lower risk to assume the risk, and bear the cost, for people whose property is at high risk,” Solomon wrote in an email. “Who would want to do that, especially since the people close to the water -- and at a higher risk -- generally have more money than the ones farther away?”

The NAS paper, published on July 24, made no recommendations but described community-based flood insurance (CBFI) as a tool -- as yet untested in the United States -- that could be used to shield communities from the financial damage wrought by floods. By providing an additional incentive to invest in coastal defenses or other flood mitigation, the system could also reduce communities’ exposure to floods themselves, the paper said

“CBFI may create new opportunities to reduce flood losses, and may enhance the likelihood of communities paying more attention to flood risk mitigation,” the NAS said in its 66-page paper.

A single policy would cover individuals in flood-prone areas and would collect premiums via property taxes, utility bills or other mechanisms, said Henry Vaux, a professor emeritus of Resource Economics at the University of California, Berkeley, who chaired the Committee on Community-Based Flood Insurance Options.

He argued that community members could be compelled by a local ordinance to join a program, increasing the number of participants from those covered by the voluntary NFIP, and potentially reducing individual premium costs because more people are covered.

“It includes more people, meaning that you are spreading the risk across a larger base and therefore the cost of the premiums may be lower,” he told NJ Spotlight.

Greater participation would also drive down administrative costs, Vaux said, because insurers would have to write only one policy rather than thousands of individual versions under the current system.

Asked whether a community-based system would be able to require participation by unwilling individuals, Vaux said any such requirement would apply only to those in flood-prone sections. He said administrators could use property liens, as they do to enforce property-tax payments, to force exposed individuals to join the program.

“There would have to be some coercion, there’s no question,” he said.

A community-based system would also eliminate so-called free-riders -- people who don’t take out flood insurance because they don’t have mortgages so are not required to, and who believe they will be made whole by state or federal authorities in the event of a disaster, Vaux said. All residents in flood-prone areas would have to participate, Vaux said.

John Miller, legislative chair of the New Jersey Association for Flood Plain Management, a public-safety group, said the NAS paper offered some “creative” solutions to insurance and mitigation in an especially flood-prone state.

He said the concept of community-based insurance is already being applied by the Municipal Excess Liability Joint Insurance Fund, which covers insurance-excess charges to about 60 percent of local governments in New Jersey, and which might offer a model for community insurance, as described by the NAS.

The system described in the NAS paper has the potential to encourage mitigation measures, Miller said.

He argued it would encourage municipalities to look closely at whether they are encouraging new construction in risky areas, and whether they should consider raising structures or offering voluntary buyouts in flood-prone locations.

“A program that says ‘this whole community will have to think together in terms of its future risk’ should help promote more mitigation and more avoidance of future risk,” Miller said.

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