FEDERAL FLOOD INSURANCE PREMIUMS ON THE RISE IN FLOOD-PRONE AREAS

The Trump administration’s changes to federal flood insurance could mean rising premiums in flood-prone areas. By altering the way risk is calculated under the National Flood Insurance Program (NFIP), the proposed plan could cause property values to fall and hurt communities with higher flood risks. 

According to Bloomberg, FEMA plans to use private-sector data to calculate the real flood threat for each residential property and set premiums based on that data. This will be a big change from the current federal flood insurance program that determines rates based on whether a home is inside or outside of the 100-year flood plain. FEMA dubbed the initiative “Risk Rating 2.0.”

WHAT THE NEW FEDERAL FLOOD INSURANCE RATES MEAN

Most American households with flood coverage receive their policies through the National Flood Insurance Program, which covered about 5 million policyholders in 2017 — a number that has fallen about 10 percent despite the recent increase in flood-related natural disasters. Even so, claims continue to outpace premiums, leading to a debt of $30 billion for the program in 2017. Additionally, the current models that determine rates don’t take into account the different causes of flooding, such as intense rainfall, or the distance from a home to a coast or river.

The new system plans to address these issues by pairing its existing mapping data with “commercial catastrophe models,” as well as the “geographic and structural characteristics” of the home. The ultimate goal is to create more transparent and relatable costs. “Policies that are easier to sell and buy = more insurance coverage,’’ noted a briefing document presented by FEMA to private flood insurance representatives.

FEMA will also incorporate the cost of rebuilding a structure into is new flood insurance rates. This will help address the inequity of lower-value homes paying the same rates as higher-priced homes.

Lowered Costs for Some, Rising Costs for Others

This revamp could lead to higher rates for some and lower costs for others, causing affordability concerns for lawmakers and communities in flood-prone regions. Neighborhoods with the highest risk will pay the most and likely see a drop in property values. 

Michael Hecht, president and CEO of the Louisiana economic development group Greater New Orleans Inc., called FEMA’s risk rating system a “double-edged sword.” 

“Everybody agrees that we should be using technology to improve the understanding of flood risk at both the consumer and the government level,” Hecht said. “But on the flip side, we also know that this greater accuracy and detail down to the home level means there are going to be people who see their rates significantly decrease and those that significantly increase.”

FEMA acknowledged the potential for higher rates and is looking for ways to “minimize financial burden and unintended harm.” Proactively, Congress has set limits on how much FEMA can increase the premiums.

More About NFIP and the Need for an Overhaul

Despite concerns about rising costs for flood-prone areas, most agree that an overhaul of the system is long overdue. Mostly unchanged since the 1970s, the National Flood Insurance Program was created in 1968 by Congress to share the risk of flood losses through flood insurance and to reduce flood damages by restricting floodplain development. 

According to FEMA, the National Flood Insurance Program aims to reduce the impact of flooding on private and public structures. It does so by providing affordable insurance to property owners, renters and businesses and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures. Overall, the program reduces the socio-economic impact of disasters by promoting the purchase and retention of general risk insurance, but also of flood insurance.

FEMA notes that floods are the nation’s most common and costly natural disaster and cause millions of dollars in damage every year. Floods cost America, on average, $8.2 billion each year (according to 2015 data). Recovering from just one inch of water inside your building can cost approximately $27,000. 

Flood insurance is often required for homes and businesses in high-risk flood areas due to the fact that federally regulated or insured lenders require those type borrowers to hold flood insurance. FEMA states that, while flood insurance is not federally required if you live in a moderate-to-low-risk flood area, your lender may still require you to have insurance. In addition, if you live in a high-risk flood zone, and you’ve received federal disaster assistance in the form of grants from FEMA or low-interest disaster loans from the U.S. Small Business Administration (SBA) following a Presidential Disaster Declaration, you may be required to maintain flood insurance in order to be considered for any future federal disaster aid.

NFIP and Climate Change Concerns

Further complicating matters for the National Flood Insurance Program is the potential risk of how future climate change might affect flooding. The National Oceanic and Atmospheric Administration (NOAA) forecasts that 25 states could experience “major or moderate flooding” this spring as downpours and massive snow melts continue to wreak havoc on the midwest. 

The NRDC states that floods are the most common — and among the most deadly — natural disasters in the United States, bringing destruction to nearly every state and county. In fact, the nation’s floodplains are expected to grow by approximately 45 percent by the end of this century. 

The Union of Concerned Scientists (UCS) revealed that, in 2017 alone, 25 people lost their lives trapped in floods, and more than $3 billion were lost in property damages and ruined crops. It’snot just the coastal states that are experiencing the effects of flooding. Many inland areas in the U.S. are flooding more often, due to heavy rainfall along with the manmade alterations of land and water sources.

According to the Washington Post, the NFIP covered 5 million policyholders to the tune of $1.3 trillion. It has more than 60,000 policies in force across the states hardest hit by the current floods, providing $11.6 billion in coverage for Nebraska, South Dakota, Missouri, Iowa and Wisconsin. In 2017, the NFIP took in approximately $3.6 billion in premiums and paid out $8.7 billion, raising the program’s total debt to more than $20 billion.

LOOKING FORWARD

David Maurstad, deputy associate administrator for insurance and mitigation, has said the new system “will help customers better understand their flood risk and provide them with more accurate rates based on their unique risk.” 

Michael Berman, a former chairman of the Mortgage Bankers Association who also worked for the Obama administration, said, “Anything that they can do to improve people’s understanding of flood risk compared to binary 100-year floodplain is good for consumers and good for investors in the long run, even if it raises premiums.”

The new system will take full effect in October 2020. Until then, only time will tell how the new Federal Flood Insurance premiums will impact communities, businesses, and property values. 

Questions or concerns about how the flood insurance plan could impact your property value? Contact MountainSeed today.