FEMA Posts Dates for Some Flood Insurance Increases

In a newsletter posted on Tuesday (July 30), the Federal Emergency Management Agency (FEMA) announced the following schedule for increases in National Flood Insurance Program (NFIP) premiums.

The increases are a result of 2012 legislation aimed at putting the program on a more solid fiscal foundation and building a catastrophic reserve fund to provide for claims in years with unusually costly flood disasters. The NFIP has been operating with a debt of about $17 to $20 billion beginning with the massive storms of 2004 and 2005. Since then, and because of the borrowing done in those years, which is still being paid back, the program is forced to borrow to pay out flood claims for catastrophic events, including Sandy.

ALREADY UNDERWAY

• Full-risk rates now are being applied to newly purchased property, to property not previously insured, and to policies that are re-purchased after a lapse.
• Premiums for older (pre-FIRM or built before Dec. 31, 1974) non-primary residences in Special Flood Hazard Areas will increase by 25% annually until they reflect the full-risk rate.

BEGINNING OCTOBER 2013

• Premiums for pre-FIRM business properties, severe repetitive loss properties (1–4 residences), and properties on which claims payments exceed fair market value will increase by 25% annually until they reflect the full-risk rate.
• Routine rate revisions will include a 5% assessment to build a catastrophic reserve fund (see below).

ANTICIPATED IN LATE 2014

• Premiums for properties affected by map changes (see below) will increase by 20% each year to reach full-risk rates.

WHO WON'T BE AFFECTED

• Owners of primary residences in SFHAs (Special Flood Hazard Areas) will keep the subsidized rates until the home is sold; the policy is allowed to lapse; a new policy is purchased; or a string of severe losses is experienced.
• Post-FIRM rates for all zone classes will be unaffected by Section 100205 of the Biggert-Waters Act.

A RESERVE FUND

The legislation requires establishment of a reserve fund to pay for future losses. A 5% premium increase on all policies will go toward the reserve fund. Preferred Risk Policies and Group Flood Insurance Policies are exempted from the 5% assessment.

PHASE-OUT OF OTHER DISCOUNTS

Section 100207 of the new law calls for phasing out discounts, including grandfathering. Grandfathering allows homes that were constructed according to an earlier standard to retain that insurance rating when new maps are issued. Because of the complexity of this issue, FEMA is conducting an analysis before full implementation can take place, scheduled for late 2014. Many discussions are taking place in Congress that may further affect the implementation of this provision.

Premiums also will increase for properties insured by the Preferred Risk Policy (PRP) Eligibility Extension, which had allowed structures mapped into a high-risk area to remain insured at lower PRP rates.

Phase-out of both grandfathering and the Preferred Risk Eligibility Extension will begin in 2014. Rates are anticipated to rise 20% per year over a 5-year period until they reach full risk rates.

The CRS discount rates will not be affected by the Biggert-Waters Act.

ACTION TO TAKE

Homeowners and business owners are encouraged to learn their flood risk and talk to their insurance agent to determine if their policy will be affected by the new law. Property owners who face increased premiums should discuss options such as verifying the accuracy of the rate determination, increasing the deductible, or retrofitting to or rebuilding at a higher elevation.

Communities that are not already in the CRS can consider joining, and obtain a premium discount for their residents. Participating CRS communities can consider increasing their CRS activities to lower premiums even more. Also, grants may be available from FEMA, via the states, to help communities with mitigation, relocating, and rebuilding. Finally, technical advice on building and rebuilding to mitigate future flood damage is always available through the FEMA website, the FEMA Regional Office, the office of the State NFIP Coordinator, and the ISO/CRS Specialist.

Many questions about the effect of the new Act are answered at http://www.fema.gov/national-flood-insurance-program/flood-insurance-reform-act-2012. 

CONGRESS MOVES NFIP TOWARD FISCAL SOUNDNESS

One year ago this month, Congress passed and the President signed the Biggert-Waters Flood Insurance Reform Act of 2012. The law extended the National Flood Insurance Program for five years, and calls on the Federal Emergency Management Agency (FEMA) and other agencies to make a number of changes to the way in which the National Flood Insurance Program (NFIP) operates. Some of the required changes have occurred already, while others will be implemented in the coming months and over time.

The most important provisions of the legislation are aimed at putting the program on a more solid fiscal foundation and building a catastrophic reserve fund to provide for claims in years with unusually costly flood disasters. The NFIP has been operating with a debt of about $17 to $20 billion beginning with the massive storms of 2004 and 2005. Since then, and because of the borrowing done in those years, which is still being paid back, the program is forced to borrow to pay out flood claims for catastrophic events, including Sandy.

This situation has come about in part because of the way in which the National Flood Insurance Program was structured at its inception in 1968. Communities that joined the program had to adopt minimum standards for new construction, and insurance premiums were set using those minimum levels. But owners of buildings that existed before FEMA mapped the Special Flood Hazard Area (now known as pre-FIRM properties) did not have to meet these standards, nor were their properties subject to risk-based premiums. Instead, they were eligible for subsidized insurance rates that did not reflect their true flood risk. Unlike full-risk premiums, subsidized premiums have been set at a rate that is not sufficient to fund the reserves for anticipated losses and expenses that will occur within the subsidized rate classes.

Now, 45 years later, big storms and seasonal flooding continue to wreak havoc, while the amount of flood damage and the costs of rebuilding are rising. Artificially low rates and deep subsidies are no longer sustainable.

To strengthen the NFIP financially, Section 100205 of the new law requires FEMA to begin charging rates that reflect true flood risk. The vast majority (81%) of NFIP policies will not be affected by the new law, because their premium rates already accurately reflect their flood risk.

Policies for properties within CRS-participating communities will still receive the community-wide CRS discount.