Big Changes to Flood Insurance Rates

CHANGES TO FLOOD INSURANCE PROGRAM

We paid our first revised flood insurance premium today – a 20% increase from what we paid last year for the same level of coverage. Our premiums will continue to rise for the next four years, up to 25% at a time. Why? The National Flood Insurance Program (NFIP), a federal program under FEMA, is broke.

With a debt of more than 18 billion dollars, the FEMA flood program is not sustainable. Who covers this huge deficit not covered by flood insurance premiums? Taxpayers do.

Wind and Flood damage from Hurricane Sandy - 2012 — Wind and flood damage from Hurricane Sandy – 2012

Brief History of Flood Insurance

In 1965, Hurricane Betsy struck New Orleans and the ensuing floods destroyed numerous homes. No flood insurance existed to help the homeowners recover. Traditional insurance companies did not want to offer flood insurance because there were no ratings, models, or statistical probabilities available.

So the government stepped in making flood maps, models, and generating the necessary statistics to account for the probability of a flood event. The National Flood Insurance Program was formed in 1968. It allowed individuals to purchase insurance (via insurance agents) through the government to cover floods.

In 2005 Katrina devastated New Orleans and much of the Gulf Coast. The cost of recovery proved to be greater than incoming insurance premiums could cover. FEMA was forced to borrow 16 billion dollars from the government to cover the cost. This was a major set back to the program. Something had to change.

In July 2012, Congress signed into law extensive changes to the National Flood Insurance Program (NFIP). This was before Super Storm Sandy served up a path of destruction, covering an area the size of Europe, in late October of 2012.

The Biggert-Waters Flood Insurance Reform Act of 2012, as it is called, has significant implications for anyone who has flood insurance. The short summary: your flood insurance rates are going to go up. These rates are allowed to go up as much as 25% per year (for the next 5 years) until actuarial rates (estimate of the expected value of future loss) are achieved.

How high your rates will go up will vary depending on your location and situation. The short list of homeowners who can expect to see their rates rise dramatically:

residential property that is not the primary residence of an individual (vacation homes)
any severe repetitive loss property (four or more claims over $5,000 or two claims that exceed the value of the property)
flood damages that cumulatively exceed the fair market value of the property
any new policy or newly purchased property in high risk flood areas

The taxpayers cannot continue to subsidize people whose homes are known to be in high-risk floodplains. The rates have to go up to cover the costs and risks inherent in living in these areas. Ultimately, some homes will have cost prohibitive rates resulting in homeowners who can no longer afford the flood insurance premiums. There are no easy or simple remedies.

Flood insurance rates are determined by the home’s base flood elevation. A house above the base flood elevation entitles the owner to pay a lower flood insurance premium – a very good reason to consider lifting your house.