A recent article in the New York Times, available here, emphasizes how those impacted by Hurricane Sandy and trying to rebuild may be looking at new requirements to purchase flood insurance from the National Flood Insurance Program (NFIP) or, if they already had coverage under the NFIP, their rates may go up dramatically during the next few years. Many worry about how these changes will affect coastal dwellers of modest means. Dramatically higher costs will likely result in displacing many from coastal communities where their families have lived for a long time, sometimes generations. While this is not a positive result of changes to the NFIP, it seems unavoidable if we want those that choose to live in hazardous coastal areas to pay the costs of living there rather than force much of that cost onto other taxpayers.
All those around the country with NFIP coverage will be hit hard over the next few years by changes in 2012 legislation passed before Hurricane Sandy hit New Jersey and New York. The law decreases the subsidies that taxpayers give to the NFIP and will increase the number of properties required to have NFIP coverage to receive federally-insured mortgages. The idea is that this will help put the NFIP, which already had an $18 billion debt before Sandy, on sounder financial footing by making the program operate a little more as if it were a private insurer seeking to cover its risks by premium rates that accurately reflect that risk. As these changes diminish subsidies, the costs to those required to have flood insurance will be great.
Some significant changes to the NFIP under the 2012 law include:
- The cap on premium increases per year is raised from 10% to 20%
- Current subsidies for properties that were built before the area was included in the NFIP’s Flood Insurance Rate Maps (FIRMs) will be phased out by allowing up to 25% annual increases in premiums for the following:
- New policies or lapsed policies
- Policies for newly purchased properties
- Any residential property that is not the primary residence of the owner
- Severe repetitive loss properties (those with 4 or more claims over $5,000 or 2 claims that exceed the market value of the property)
- Any property where the owner has refused a FEMA mitigation offer under the Hazard Mitigation Grants Program
- Any property that has suffered substantial damage or substantial improvement; “substantial” in these cases has been newly defined as 30% of the fair market value of the property
- Any business property
These changes will affect far more than those currently living within a flood zone as indicated by current Flood Insurance Rate Maps. As FIRMs are redrawn, many new properties will be added and the zone of properties currently within a flood area may increase. These changes can lead to massive increases in premiums. For example, if the current FIRM indicates a home is currently in an “AE” zone and built at the Base Flood Elevation and the new FIRM now indicates that the Base Flood Elevation is one foot higher and the house is in a “VE” zone, the annual increase in the owner’s flood insurance premium would be $12,395!
The 2012 changes also revamp the NFIP’s Community Rating System (CRS). The CRS assigns points to communities based on enforceable policies that help reduce the risk of flood loss. The more points a community gets, the lower the NFIP rates will be for those in the community. If local governments lose points because the local government does not re-evaluate its regulations under the new criteria, this will result in even more increases in premiums for local NFIP policy holders. Thus, this should serve as an excellent way for local governments to foster support for better policies at the local level based on the ability to lower everyone’s flood insurance rates.