Flood Insurance Affordability

The National Flood Insurance Program (NFIP) is over $24 billion in debt following disasters such as Hurricanes Sandy and Katrina.1 The program was created in the 1960s because insurers were leaving the flood insurance market due to outrageous risks. Its purpose is to subsidize the policies of property owners in flood risk areas and, for some, is the only way to get affordable flood coverage. Today, about 20% of the 5.5 million flood policies in effect are subsidized by the NFIP. The other 80% pays premiums based on actual risk, which is the point of insurance to begin with.2 What began as a successful solution to unaffordable rates has become an economic disaster, leaving taxpayers to pick up the tab.

The program made it affordable for anyone to live in areas that are deservedly uninsurable without government support. Climate change is no longer just a theory. According to the consulting firm AECOM, the rise in sea levels could increase flood hazard areas along the coast by 55% in the next century. Despite this problem, coastal populations have increased by 40% since 1970, the result is that 40% of the US population lives in a county with a coastline.3 Decades of low premiums have given few incentives for property owners to take preventative actions and will cost taxpayers billions more when another disaster occurs. Coastal development is still on the rise and people seem ignorant to the growing risk floods and the detriment that their subsidized policies have had on the economy. After the program paid $7.9 billion in claims in 2002, an average of $55,000 per payout, it was apparent that something needed to be done.2

Enter the Biggert-Waters Flood Insurance Reform Act of 2012. The act, which was passed with huge support by both the House of Representatives and the Senate, was aimed at weaning policyholders off of subsidized rates. It also called for an overdue remapping of flood risk areas that are used to set premiums. The goal was to stop the NFIP from going deeper into debt by lowering subsidies so that policyholders were paying risk-based premiums.2 However, the new law did not go over well for some people. Mike Cellucci, an insurance agent at Cellucci Foran Insurance Inc., Said he saw “some policies increase by as much as 200% since [Biggert-Waters] was put in place.” Flood coverage instantly become unaffordable for many policyholders. In addition, Biggert-Waters eliminated the “grandfathering” clause. This clause was for homeowners who had built their homes to code prior to a remapping that placed them into a high flood-risk area, which changes the building requirements to more flood-safe construction. For homes that fell within the guidelines of a grandfathered property, owners were entitled to lower rates for a set period of time so that they could ideally alter their home to meet the requirements.2 When this clause was eliminated, more homeowners experienced huge increases in the price of flood coverage.

The skyrocketing of rates caused a public outcry by those who were used to their subsidized rates. The protest of the 20% minority who were receiving surreal flood insurance rates may not have gained traction except for one thing: the people who can afford those luxurious shore properties have a lot of money and, at least in this country, money tends to go hand in hand with political influence. “The wealth and power of these policyholders played a clear role in the undoing of [Biggert-Waters]. Taxpayers will be forced to make up the difference,” Cellucci explained. “The worst part is that a large part of the opposition was made up of people who could easily afford to pay a [risk-based] price for coverage.”

The “undoing” of the Biggert-Waters Act came in the form of the Homeowner Flood Insurance Affordability Act. President Barack Obama signed it on March 28 of this year after passing through the House of Representatives and the Senate at 306-91 and 72-22 votes, respectively.1 Details of the law include:

* Rates for homeowners will be lowered to the same or nearly the same as they were before Biggert-Waters was put into effect * Annual rate increases will be no more than 18% for individual policyholders and 25% for owners of businesses and second homes * Grandfathered policies will continue to have subsidized rates until their grandfathering expires * Eliminates the provision of Biggert-Waters that removed subsidized rates when a primary home is sold

The new law gives FEMA 18 months to perform a study on flood insurance affordability and 36 months to find a way to assist policyholders who truly cannot afford the high premiums associated with risk-based pricing. A proposal is due in 2017 before the new law is up for reauthorization. The goal is for FEMA to limit annual premiums to $2,500 for $250,000 worth of coverage.4

There are certainly some benefits to the new law. It will prevent homeowners from going broke due to the large increases in rates that they were facing for flood coverage that wasn’t always very helpful. According to Kevin Hamill of Alliances Insurance Agency, LLC, “Often times the flood insurance policy can cost significantly more than the actual homeowners policy… And the flood policy is so restrictive and not nearly as comprehensive as a homeowners policy.” It will also save coastal businesses in two ways. First, they will not have to pay premiums so high as to offset their income. Second, customers will continue living in the area and have more money to spend at local stores. Increased rates were also affecting home sales. “More than 40,000 home sales were delayed or cancelled within a few months of the law because of confusion and unaffordability of new rates,” According to the National Association of Realtors.5 The new law will help to stimulate the housing market in coastal areas again.

The act, however, has downsides that are more severe than the benefits. As the graph below shows, Disastrous floods are becoming more and more common. A solution to the very real and very time-sensitive issues of more floods occurring and sea levels rising is now being kicked down the road to be dealt with later. Coastal development will not be slowed despite the increasing risk. The new law also fails to recognize what increased flood coverage rates are saying. That is, people are living in a dangerous area and need to start planning accordingly. Biggert-Waters was a wake-up call that coastal inhabitants were unprepared for. The new law will also put an already-hurting NFIP even further into debt as it pays to subsidize more premiums and pay more losses in the coming years. Phuong Nguyen of Kate Leung Insurance Agency, Inc explains, “The affordability act is a big over-correction of the previous law. Rather than fixing the visible problems, it puts a veil over them until someone deals with it. Hopefully it will not be too late by then.” Nguyen went on to argue, “it is a fake fix. In a few years, policies will become unaffordable again and nobody will have done anything to prepare for it. Rates will climb, albeit at a slower rate, and the government will be back to square one with no problems solved.” Another issue is that it isn’t an instant “fix” for the people paying inflated premiums. It could take up to a year for FEMA to calculate the lower rates.6 It will spend its time doing that instead of searching for answers to the real problem.

There is no simple solution to the problem of affordable flood insurance coverage. People will live where they want to live and will find ways to do it. Experts have speculated on some alternative ways of alleviating the problem such as voucher systems and tax benefits to give policyholders incentives to take preventative measures or relocate completely.4 It is unclear what will happen in the future. The only things that are relatively certain are that flood risk is constantly increasing and our government is going to go further into debt by helping stubborn homeowners live in dangerous areas.

SOURCES

Graph - http://lh3.ggpht.com/-d75qLSqqU-s/Tl2TmPJ5iuI/AAAAAAAAEgU/upomG8bVzZQ/image6.png?imgmax=800

1 http://www.tampabay.com/news/business/banking/us-house-overwhelmingly-passes-flood-insurance-relief-bill/2168553 2 http://abcnews.go.com/US/wireStory/ap-impact-flood-insurance-hikes-peril-23030813 3 http://thinkprogress.org/climate/2014/03/25/3418323/flood-insurance-program-reforms/ 4 http://www.brandonsun.com/world/breaking-news/no-easy-fix-on-flood-insurance-but-experts-say-options-exist-to-improve-program-252028591.html?thx=y 5 http://www.cnbc.com/id/101539750 6
http://www.argusleader.com/story/news/local/2014/04/02/slow-flood-insurance-relief-pains-sd-proprietor/7217669/