The distributional impact of FEMA’s community rating system

Abstract

Community Rating System (CRS) incentivizes investments in risk reduction above NFIP standards using discounts on insurance premiums. These discounts are cross-subsidized by increasing premiums in non-CRS communities. We examine the distribution of these subsidies and find that redistribution does occur, but the gains and losses are not economically large with 95% of households gaining or losing no more than 0.3% of household income. We also examine their relationship with other community characteristics and find that the strongest predictor of premium reductions is the underlying flood risk level within the community. Thus, CRS appears to reduce the cost of living in the riskier communities.