The five-year extension of the National Flood Insurance Program (NFIP) last July was an achievement hailed by the National Association of REALTORS® for bringing stability and certainty to the federal program that enables property owners to access affordable flood insurance when required for a mortgage. But the new law also phases out government subsidies for some properties, which has caused confusion and consternation among practitioners who need to explain the abrupt rate increases to home owners and buyers.
At the Flood Insurance 101 session at the Midyear Legislative Meetings & Trade Expo last week, officials from the Federal Emergency Management Agency (FEMA) explained that the increases in premiums and rate structures were necessary to help put the agency on more solid financial footing. FEMA is currently facing $24 billion in debt in the wake of several catastrophic storms in recent years. “These changes will make the flood program more structurally sound in terms of pricing and rating,” said FEMA Senior Advisor Kristin Robinson.
About 5 percent of the 5.6 million NFIP policy holders will see rate increases of 25 percent annually until their “true risk premium is reached,” explained Andy Neal, an actuary with FEMA. This change affects about 250,000 policy holders for second homes, business properties, and so-called severe repetitive loss properties. Those increases took effect in January. Another 10 percent or close to 600,000 primary residences will retain their current subsidies until the home is sold to a new owner or the policy lapses and a new one is purchased. About 240,000 condos and multi-family properties, which account for 4 percent of the total, will not see an immediate subsidy removal. Because about 80 percent of flood policies are not subsidized—meaning they are already paying premiums at their full actuarial rates—4.5 million properties are not affected by the by the new provisions under the Biggert-Waters Act, but are still subject to routine annual rate increases.
Properties located in communities where new flood insurance rate maps are being drawn are no longer grandfathered in for discounts, Neal noted. “But the pain is lessened because those rates will be phased in gradually over five years and will not be implemented until 2014.”
Neal explained that home and business owners have options for lowering their insurance costs, including obtaining an elevation certificate to determine a more precise rate, and rebuilding a home to a higher elevation to lower flood risk. “Right now some people are actually paying more than they have to because they haven’t wanted to spend a few hundred dollars for an elevation certificate,” he said. Annual premiums without subsidies vary widely—from $300 to $10,000— depending on the property and level of flood risk.
About half of all flood policy claims come from just five metropolitan statistical areas: New Orleans, Houston, Tampa, Miami and New York-New Jersey.
NAR is continuing to monitor the data on rate increases as it evolves, recognizing that access to affordable flood insurance is an essential component of many real estate transactions in affected areas.
—Wendy Cole, REALTOR® Magazine