The National Flood Insurance Program
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 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, specifically.
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Previously reported – October 2020
Community Rating System (CRS)
The Town’s CRS rating is being lowered from eight (8) to seven (7) which will result in an additional downward adjustment to all property owners flood insurance premiums. That would be the third favorable adjustment, each with a 5% reduction of your flood insurance premiums. To be clear, we will now enjoy a 15% reduction in flood insurance premiums due to the new lower CRS rating. Timbo has been the driving force in getting us to qualify for the lower rating allowing us to enjoy significant savings and is very much appreciated. KUDOS!
Previously reported – February 2021
Flood-prone homeowners could see major rate hikes in FEMA flood insurance changes, new study finds
With a major overhaul of the nation’s flood insurance program just months away, new data released Monday by the First Street Foundation suggests hundreds of thousands of homeowners in the riskiest locations across America could face massive rate hikes starting in October. The Brooklyn, New York-based research group estimates the average rate needs to more than quadruple on the nation’s most flood-prone homes under the ongoing effort to make the federal flood insurance program solvent and ensure homeowners most at risk are paying their fair share.
First Street data projects that the majority of homeowners won’t see big rate changes, and others could see premiums decrease. But for some 265,000 properties, annual premiums would need to climb $10,000 or more to match the actual risk. Those with more expensive properties are estimated to see the biggest premium increases. Any actual rate hikes adopted by the federal government would be slowly phased in for existing policyholders.
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Flood Insurance Costs Vastly Underrated by FEMA, New Report Says
At a Glance
- A new report takes into account the cost of damage.
- FEMA doesn’t currently factor that in to flood insurance premiums.
- The fee structure for the federal flood insurance program is set to change this year.
Hundreds of thousands of homeowners across the U.S. would pay considerably more in federal subsidized flood insurance if rates accurately reflected the risk, according to a new report from research group First Street Foundation. The report comes at the same time the Federal Emergency Management Agency is working to revise premiums for the National Flood Insurance Program. FEMA says the new premiums will be more in line with real-life costs. If the First Street data is any indication, that could mean rates more than five times higher than what they currently are. First Street, a nonprofit research and technology group, identified 4.3 million residential properties as having substantial flood risk that would result in damage and financial losses. Under current FEMA rules, flood insurance rates are based mostly on whether or not a property is within a designated Special Flood Hazard Area, which requires flood insurance if a homeowner has a federally backed mortgage. The rates don’t take into account a home’s value, estimated cost of damages in the event of a flood and other factors, according to Matthew Eby, founder, and executive director of First Street. That means the cost of flood insurance for a $300,000 home could be the same as for a million-dollar home. “The rates are really low for some properties that have substantial risk,” Eby told weather.com in a recent interview. “And the reason for that is because FEMA does a zone-based approach to flood risk.” The foundation calculated annual estimated losses over a 30-year-period to determine what homeowners should be paying for flood insurance. About 2.7 million of the properties identified by First Street are outside of an SFHA. The foundation estimates that under the current system, flood insurance costs would need to increase by 5.2 times, which would bring annual premiums up to about $2,484 a year. Those inside an SFHA would face premium increases of 4.2 times, costing $7,895 a year. Costs would vary once other factors are thrown into the mix. And the prices would go up as climate change increases costs and makes flooding more likely, according to the report. The total expected loss from flooding this year is $20 billion. But that goes up to nearly $32.2 billion in 30 years. FEMA is expected to raise rates for flood insurance on Oct. 1. The agency says people should not assume that the First Street estimates are the same as the new NFIP rate structure, called Risk Rating 2.0. “Any entity claiming that they can provide insight or comparison to the Risk Rating 2.0 initiative, including premium amounts, is misinformed and setting public expectations that are not based in fact,” David I. Maurstad, who runs the flood insurance program for FEMA, said in a statement, according to the New York Times. The NFIP is operating under a loss of more than $36 billion, according to First Street. First Street introduced a new tool last year called Flood Factor, which is an interactive website that lets people look up flood risk by address. As part of its new report, the foundation added estimated costs of flood damage and losses over the course of 30 years to the tool.
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Previously reported – March 2021
Big flood insurance rate changes are coming to NC. Will they be fair?
Climate change denial isn’t just the domain of recalcitrant contrarians. It’s baked into the way the risks and costs of flooding are calculated in North Carolina and around the nation. Government-backed flood insurance – often the only option for homeowners along the coast and near rivers – is based on outdated flood maps that fail to reflect how climate change is increasing the regularity and scale of flooding. Those maps have skewed insurance rates downward and left wide swaths of land where properties should be insured against flooding but are not.
Fortunately, that’s about to change. The National Flood Insurance Program (NFIP) managed by the Federal Emergency Management Agency (FEMA) is preparing to unveil the sweeping changes in assessing flood risk and setting insurance rates. The new approach, called Risk Rating 2.0, will begin Oct. 1. In North Carolina, with its long coast and many flood-prone areas within its coastal plain and mountain region, the changes will have a major impact. There will be a shift in rates – higher for some, lower for others – and more accurate risk assessments could show more property owners that they need protection against flooding. NFIP rates will no longer be based on zones. Instead properties will be individually rated depending on updated weather patterns and individual aspects of a specific property. Amanda Bryant, director of the website myfloodrisk.org, said that will mean higher rates for more vulnerable homes. “The new risk assessment will show the majority of coastal properties in North Carolina are at more risk,” she said. Former North Carolina insurance commissioner Wayne Goodwin said the rate increases come after Congress has long postponed setting premiums high enough to cover the actual risk. “The longer you wait to correct something, the greater the pain and that’s what’s happening here,” he said.
FEMA is not saying yet how much the new risk assessment will drive up rates and when. Annual premium increases are capped by law at 18 percent, but the escalation over time could change who can afford to live in coastal areas. An analysis by the First Street Foundation, a non-profit that assesses flood risks, projects that some properties could face massive rate hikes. The predictions of rate shocks for expensive homes should not obscure that the changes will benefit owners of more modest homes, said Don Hornstein, a University of North Carolina law professor who specializes in insurance law. The current system sets rates too broadly, he said, and that leads to lower-income homeowners subsidizing the cost of flood insurance for higher-income homeowners. Hornstein said the rate changes are “going to fix that by eliminating these cross subsidies that go the wrong way.” As a result, he said, more homes will get price decreases than price increases. But also more homes should get flood insurance. “Climate change is indeed driving the flood risk up for everyone,” said Rick Luettich, director of the Center for Natural Hazards Resilience at the University of North Carolina at Chapel Hill. Luettich, who develops flooding models, said the new risk assessments will be helpful to homebuyers. “There’s an aspect of it being good news if you have a better understanding of what the hazard level is and you can make a better decision about whether you want to live there,” he said. Meanwhile, North Carolina Insurance Commissioner Mike Causey sees an option to higher federal flood insurance rates. He is pushing to have private insurers get back into the flood insurance business they fled in the 1960s, necessitating the creation of the NFIP. Causey said during a meeting with Carteret County officials last year that private insurance policies could be “far superior to anything under the federal program.” He also wants more homeowners to buy flood insurance regardless of whether they are in a designated flood zone. “My message to everybody is if it rains where you live, you need flood insurance,” he said, “We’re all in a flood zone, it’s just a matter of whether you’re in a high-risk flood zone or low risk.”
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FEMA pauses flood insurance rate update after Schumer pushback: report
The Federal Emergency Management Agency (FEMA) has paused an impending update to flood insurance rates, aimed at making the country more prepared for risks of climate change, after objections from Senate Majority Leader Charles Schumer (D-N.Y.), The New York Times reported Thursday. FEMA was reportedly set to announce new rates on April 1 to better factor in climate risks, a move that aimed to reduce construction in areas with significant threats but could have increased some costs for people who live in those areas. The Times reported, citing anonymous sources, that Schumer fought the changes, and that his efforts halted FEMA’s action. Neither FEMA nor a spokesperson for Schumer immediately responded to The Hill’s request for comment. Schumer spokesperson Alex Nguyen told the Times that the agency should consult Congress before taking action and called for “affordable protection.” “FEMA shouldn’t be rushing to overhaul their process and risk dramatically increasing premiums on middle-class and working-class families without first consulting with Congress and the communities at greatest risk to the effects of climate change,” Nguyen said. “Congress and the Biden administration must work together in a collaborative and transparent process.” An agency spokesperson told the newspaper that FEMA will continue to work with Congress to carry out the plan and its changes will “better reflect an individual property’s unique flood risk.” When he was on the campaign trail, President Biden’s climate plan included provisions saying he wanted to help make the country more resilient to the impacts of climate change. His plan also notes, however, that resilient efforts “must consciously protect low-income communities from ‘green gentrification’ ” in a section that noted that some mitigation efforts can raise property values. Schumer, meanwhile, publicly pushed back on proposed FEMA flood insurance changes in 2019, saying they “unfairly put a bullseye on the backs of Long Island and New York homeowners,” and that the agency should “halt.”
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Previously reported – April 2021
U.S. rolls out first update to flood insurance pricing in 50 years
Hundreds of thousands of Americans will pay significantly more to insure their homes in coastal areas and flood zones under new rules released on Thursday by the Federal Emergency Management Agency (FEMA), the first major update to its pricing system in half a century. The agency said that, over the coming year, it will phase in a price-setting method that marks an epochal shift in the National Flood Insurance Program (NFIP), which was set up in 1968 to cover property in flood-prone areas. New premiums will be based on a property’s value, risk of flooding and other factors, rather than simply on a property’s elevation in a flood zone. They will take effect on Oct. 1, 2021, for new policies and April 1, 2022, for the rest, FEMA said. The NFIP currently provides $1.3 trillion in coverage through more than 5 million policies in the U.S. but has been losing money for years and is currently $20.5 billion in debt. The new rules will mean hefty increases for expensive properties in wealthy coastal enclaves, said Jeremy Porter, head of research and development at First Street Foundation, a Brooklyn-New York based nonprofit that studies flood risk. Current flood zone-based pricing was “basically a subsidy to people,” Porter said. Under FEMA’s new system, “pricing is based on your insurance risk.” FEMA said it expects 4%, or more than 200,000 policies, will see significant premium increases, while about 1.15 million will see decreases, noting the change makes prices “more equitable.” In a study released in February of flood-prone properties rather than policies, First Street determined that more than 4 million would face increases and the average premium in flood zones would be $7,895 a year. The numbers in First Street’s study are higher than FEMA’s because only about 30% of flood-prone properties carry NFIP coverage, Porter noted. The changes mark the first update to FEMA’s pricing methods in 50 years and are based on updated technology and FEMA’s evolving knowledge of flood risk, the agency said.
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Millions to see rate hikes under new flood insurance plan
More than 1 million people who buy flood insurance from the federal government will see their premiums drop next year under a new system that will end decades of overpayments by making insurance rates more accurately reflect a property’s flood risk, officials said yesterday. At the same time, premiums charged by the National Flood Insurance Program will rise sharply for about 200,000 policyholders, many of whom own expensive homes in high-risk flood zones and have been paying too little, the Federal Emergency Management Agency said. The vast majority of NFIP policyholders — roughly 3.7 million people — will see moderate rate increases, according to FEMA projections released yesterday. “This will address inequity that has built up over time and must be corrected,” said David Maurstad, who runs the flood insurance program for FEMA. “Property owners with lower-value homes are paying more than they should, and those with higher-value homes are paying less.” Many owners of lower-valued homes have been “paying way more than their fair share,” Maurstad added. The NFIP is the nation’s main provider of flood insurance, which is not included in standard homeowners’ insurance policies. It insures 5 million properties, mostly along the Atlantic and Gulf coasts. The overhaul in FEMA’s flood insurance rates could generate opposition from some lawmakers, particularly those from the Northeast, where a large number of people will see rate hikes. A 2019 bill by Sens. Robert Menendez (D-N.J.) and Chuck Schumer (D-N.Y.), who is now the Senate majority leader, would have barred FEMA from raising anyone’s insurance rate by more than 9% a year. New York and New Jersey will be two of the hardest-hit states under FEMA’s new system. In New York, 14% of the state’s NFIP policyholders will see their premiums increase by at least $120 a year, according to FEMA projections. In New Jersey, 15% of the policyholders will see premiums rise by $120 a year or more. “FEMA shouldn’t be rushing to overhaul their process and risk dramatically increasing premiums on middle-class and working-class families without first consulting with Congress and the communities at greatest risk to the effects of climate change,” Schumer spokesperson Alex Nguyen said in a recent statement. “Congress and the Biden administration must work together in a collaborative and transparent process.” By contrast, the percentage of policyholders facing at least a $120-a-year increase is 7% in Texas, 9% in Alabama and North Carolina, and 10% in Louisiana. In Florida, where more people buy NFIP coverage than any other state, 12% of the state’s policyholders will see a rate increase of at least $120 a year. Some policyholders will face the annual rate hikes for only a few years, while others who have been paying too little for insurance for a long time will see rate hikes for a decade or longer. The new rates will begin to take effect next April for people who are renewing policies. For new policyholders, the new premiums will take effect in October. FEMA’s announcement yesterday drew praise from environmental advocates. “This isn’t just a minor improvement but a quantitative and qualitative leap forward in more accurately pricing risk,” said Forbes Tompkins, head of the Pew Charitable Trusts’ resilient infrastructure program. Shana Udvardy, a climate resilience analyst at the Union of Concerned Scientists, said FEMA’s new insurance rates “could go a long way in helping homeowners better understand their risk, ensuring they can make informed decisions to protect themselves and their property.” The new insurance rates are the result of a yearslong process FEMA has undertaken to refine its analysis of flood risk. Under the new system, called Risk Rating 2.0, FEMA uses the latest technology and data to estimate both the risk of an individual home being flooded and the cost to replace each home. For decades, FEMA has used a crude analysis that puts homes into large geographic groupings and charges the owners the same insurance premium, ignoring distinctions that make some of the homes riskier than others. “It’s like going from a standard-definition TV to HD-quality resolution,” Tompkins said. Incorporating replacement costs into insurance premiums would result in generally higher rates in regions such as the Northeast and the West Coast, where labor and materials are more expensive than in the rest of the country. Maurstad of FEMA said he expects the new pricing would increase the number of people who have flood insurance by making the rates fairer and easier for homeowners and insurance agents to understand. “It will result in greater value and trust in the program. As a result, folks that maybe didn’t think they were at much of a risk of flooding will now know that they are, and it will be harder for them to ignore it,” Maurstad said during a news briefing yesterday. Federal law requires people to have flood insurance if they own a property that is located in a flood zone and is secured by a federally backed mortgage. But millions of people ignore the requirement, and in some cases face financial ruin when their homes are flooded and they have no insurance.
Previously reported – July 2021
Coastal Connection: Risk Rating 2.0 will change the entire flood industry
When FEMA announced the transformation of the National Flood Insurance Program with updated and modernized rating dubbed Risk Rating 2.0, questions and concerns were raised from various industries such as insurance agents and real estate professionals. As FEMA begins to release details around Risk Rating 2.0, it’s clear that the National Flood Insurance Program transformation will not just impact insurance rating, it will impact the entire flood industry. From private flood insurance companies to floodplain managers, each stakeholder will be influenced by Risk Rating 2.0’s implementation. FEMA has branded Risk Rating 2.0 as Equity in Action since the coming changes will make the National Flood Insurance Program rates more fair and easier to understand. Equity in Action replaces the current binary “in versus out” of a high-risk flood zone pricing methodology. Rather, it uses “graduated” rating, which is a pricing methodology based on factors such as distance to water, types of flood exposure, and other advanced elements. Equity in Action will also bring more equity to National Flood Insurance Program policyholders by basing rates off of the building’s replacement cost. The higher the building’s replacement cost, the more expensive the premium, and vice versa. In April, FEMA issued a press release on Equity in Action and state fact sheets showing projected rate changes:
- 11% of NFIP policyholders will see a premium increase of over $120 per year.
- 63% of policyholders will see premium increases of $0 to $100 a year.
- 23% of NFIP policyholders will see a premium decrease.
The changes in the new National Flood Insurance Program rating methodology will have impacts throughout the entire insurance industry. For example, once Equity in Action takes effect, private flood insurers may find expanded or changed opportunities to sell policies that will close the insurance gap. Overall, what FEMA will accomplish in the transformation is making the National Flood Insurance Program part of a rapidly evolving and competitive flood insurance environment where insureds ask to see a quote from multiple carriers, one of them being the National Flood Insurance Program. Changes under Equity in Action are not limited to the world of insurance. The impacts and benefits of mitigation options, such as the elevation of a home, have been difficult to clearly communicate, and are not always viable. The coming changes to the National Flood Insurance Program bring better solutions and easier communication for mitigation options. Under Equity in Action, premium credits will now be given for the elevation of mechanical equipment, currently not a creditable mitigation activity under the National Flood Insurance Program. The NFIP is changing how home elevation premium reductions are calculated. Currently, premium discounts max out when a building is elevated 4 feet above the base flood elevation. But with Equity in Action, the higher you go, the less the premium will be. Importantly, mitigation credits will apply everywhere, not just for those properties in the high-risk flood zone. These changes will also enhance the flood resilience of our communities. As the financial benefit of mitigation grows, so will the elevation and mitigation of buildings. Essentially, the mitigation elements of Equity in Action will have a trickledown effect that benefits many other stakeholders. In April of this year, House Financial Services introduced a discussion draft of a National Flood Insurance Program reauthorization and reform bill. The bill, among its other elements, proposes to lower the annual increase cap on National Flood Insurance Program premiums from 18% to 9%. Since FEMA notes that policy premiums will increase up to the maximum statutory cap under Equity in Action, this was a clear reaction from Congress. While there are still legislative issues and priorities to tackle, Equity in Action will address long standing programmatic issues that Congress may no longer need to address in forthcoming flood reform such as using replacement cost when determining rates. In early 2021, a media storm followed the release of information about potential impacts of Risk Rating 2.0. For the first time, those who never heard of or cared about flood risk began to talk about the topic and Equity in Action will make flood risk easier to communicate. Equally important is to understand that the change that FEMA is planning will impact far more stakeholders than just those that interact with National Flood Insurance Program insurance. Equity in Action modernizes the National Flood Insurance Program in a way that has not been seen in the 53-year history of the program. Whether stakeholders involved appreciate the changes or not, Risk Rating 2.0 will change the landscape of insuring against and communicating flood risk.
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Previously reported – August 2021
FEMA overhauls the National Flood Insurance Program for climate change
- Under the new model, FEMA will factor in the impacts and risks of climate change.
- “No question that this is the most substantive change to the program going back to 1968,” said FEMA’s David Maurstad.
Climate change and it’s devastating impact are accelerating faster than ever, according to a new report from the United Nations’ Intergovernmental Panel on Climate Change. Hurricanes are becoming stronger, rainfall heavier and flood risk higher. Yet, America’s National Flood Insurance Program hasn’t changed at all since its inception. But it is about to. Under the current program, the Federal Emergency Management Agency provides $1.3 trillion in coverage for more than 5 million policy holders in 23,500 communities nationwide. Homeowners in FEMA-designated flood zones are required to purchase flood insurance, but others do so voluntarily. Nearly one-third of NFIP policyholders are not mandated to carry it. Starting on Oct. 1, the program will undergo a complete overhaul to make insurance pricing more accurately reflect each property’s unique flood risk. Finally, climate change will be factored in. “No question that this is the most substantive change to the program going back to 1968,” said David Maurstad, deputy associate administrator for federal insurance and mitigation and senior executive of the flood insurance program. “What we found out was that many folks with lower-value homes were paying more than they should, and those that had higher-value homes were paying less than they should. And we have a responsibility to make sure that we have actuarily sound, fair, and equitable rates. And so that’s what’s driving the change.” Today, federal flood insurance is based on the property’s elevation and whether it has a 1% annual chance of flooding. Under the new model, FEMA will also look at the home’s replacement cost; whether the risk is rainfall, river, or coastal flooding; and how close the property is to the source of the potential flooding. Most important, FEMA will now factor in future catastrophic modeling from climate change, including sea level rise, drought, and wildfires. Right now, the owner of a $1 million Florida home and the owner of a $200,000 Montana home are paying the same rates for insurance, even though their risk levels are decidedly different. Under the new model, the Florida owner would almost certainly pay more. Maurstad says rates will go up for some and down for others. The majority of homeowners, however, will see rates go up about 10%, which is the normal annual increase. “It’s just important that we address that inequity that the lower-value homes shouldn’t be subsidizing the higher-value homes going forward,” he said. This shift will inevitably change the value of some homes. The costs incurred by any home are factored into its value, whether those costs are insurance, taxes, maintenance on an older home, or the home’s location. “You can think of it as revenue coming in and expenses going out,” said Matthew Eby, founder and executive director of First Street Foundation, which calculates flood risk scores for every home in America. Those scores are currently posted on some of the nation’s largest home listing sites, including Realtor.com and Redfin. “Depending on how much that insurance goes up is going to correlate perfectly to the value of that home for any new homebuyer who comes in and says, ‘This home looks great, but now I have to pay $6,000, $10,000,’ whatever it might be, a year in flood insurance, which is just going to take away from the value of the actual asset itself,” he said.
Covering rising costs
The change in the NFIP calculation is not just to bring better equality to the program but also to help sustain it. As storm damage increases, FEMA is increasingly paying billions of dollars out to homeowners who are uninsured.
Hurricane Harvey in Houston was a stark example. More than 200,000 homes were damaged or destroyed, and three-quarters of them had no flood insurance, as many were outside FEMA flood zones. Flood zones are updated only every five years, by congressional mandate. During its reauthorization process this fall, FEMA will also put forward more proposals to make the program more fiscally stable. “No question we need to close the insurance gap. Not enough people in the high-risk area have the coverage they need to be able to be on the path to recovery after a flood event,” Maurstad said. “There’s just too much disaster, suffering, going on that we can minimize if we are able to have more people have the coverage they need.” He said FEMA has proposed a means-tested affordability program that will help low-to-moderate- income individuals pay for the flood insurance that they need. “There’s no question with climate change and the changing conditions that if we do nothing, the program is not going to be sustainable.”
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Previously reported – October 2021
New National Flood Insurance Program premiums coming Oct. 1.
Will yours increase?
The Federal Emergency Management Agency’s historic recalculation of flood insurance premiums will go into effect Oct. 1, and approximately 5 million policyholders nationwide will see changes in the coming year. FEMA’s Risk Rating 2.0 has been hailed as positive in that flood insurance premiums will now accurately reflect the real cost of flooding. For years, the National Flood Insurance Program has subsidized flood insurance by calculating premiums based on flood zone maps, and not individual, present-day structure risk. Some homeowners have been paying far less than their fair share, while others have been paying much more. Risk Rating 2.0 is meant to correct that by assessing a building’s actuarial flood risk. But there’s national concern that more than 3 million people will see their premiums increase as a result – and rightfully so based on the risk of flooding. Homeowners less likely to be able to weather an unexpected increase in their housing costs, like the middle class and low-income homeowners, could, in turn, be hurt by the policy change. More than 1.5 million will be lucky and see premium decreases. “Conscious of the far-reaching economic impacts COVID-19 has had on the nation and existing policyholders,” FEMA says, the agency is taking a phased approach to rolling out the new rates. New policies beginning Oct. 1 will be subject to the new methodology, and existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums. On April 1, 2022, all remaining policies renewed on that date or after will be subject to the new methodology. Risk Rating 2.0 will see FEMA incorporating factors like flood frequency, multiple flood types, distance to water and property characteristics to determine a structure’s insurance premium. The agency has released numbers showing how policyholders in each state will be impacted by Risk Rating 2.0. Federal law requires that most rates not increase more than 18% per year.
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If you have flood insurance, the price is likely going up.
What that means in NC
Starting this month , anyone buying a flood insurance policy will see a shift in prices due to a set of changes the Federal Emergency Management Agency has called Risk Rating 2.0. “The way that the rates are actually set is long overdue for an overhaul and has not been updated in decades, so Risk Rating 2.0 really brings the whole insurance system into the 21st century with updates that are based on more granular data about an individual property,” Laura Lightbody, director of The Pew Charitable Trust’s flood-prepared communities initiative, told The News & Observer. FEMA has touted Risk Rating 2.0 as marking a significant shift in how flood insurance premiums are set by accounting for a number of property-specific factors instead of setting prices solely based on the zone where a property sits. The federal agency oversees the National Flood Insurance Program, pricing flood insurance and also deciding which property owners need to purchase it in order to secure a federally backed mortgage. “Policyholders with lower-value homes that have been paying more than they should, they will no longer bear the cost for the policyholders with higher-value homes who have been paying less than they should. Risk Rating 2.0 fixes this injustice,” David Maurstad, the National Flood Insurance Program’s senior executive, said on a recent press call. The NFIP has historically been deeply in debt due to massive losses from storms like Hurricane Katrina and Hurricane Harvey. And losses are likely to mount as climate change continues to exacerbate natural hazards like hurricanes and heavy rainfall. Flood insurance is typically not covered by homeowners’ policies. New policies purchased after Oct. 1 are subject to the changes. Any existing policies renewing on or after April 1, 2022, will be impacted by the changes.
How is FEMA changing its formula?
Flood insurance rates have historically been based on whether a property sat in a specific zone. Rates were largely based on how flood-prone FEMA deemed that zone. Now, FEMA will consider such factors as the frequency of floods, how far a property is from water and how flooding is caused. The program will also consider information like whether a property is elevated and how much it would cost to rebuild. “Your policy is now going to be property specific. It’s going to be tailored exactly to the location and the characteristics of your house, and so the prices are going to change to reflect that additional information,” said Miyuki Hino, a UNC-Chapel Hill professor of land use and environmental planning. Steve Garrett, North Carolina’s National Flood Insurance Program coordinator, said that historically a property on the edge of a flood map would be paying the same rate as one that was much closer to a water source but in the same flood zone. Under Risk Rating 2.0, Garrett said, the pricing will be more “actuarial.” “It gives a more comprehensive picture of the flood risk of a structure but also individualizes that to that specific location,” Garrett said. Because the new formula considers replacement cost, he added, it better accounts for the actual risk posed by a specific property.
How will this impact what I’m paying for flood insurance?
The answer comes down to your specific property. There are 139,842 active flood insurance policies across North Carolina, according to data provided by FEMA. In the first year of Risk Rating 2.0, impact to premiums would include: In North Carolina, there are fifty (50) properties including two single-family homes that would see rate increases of at least $100 a month. Those properties are generally located in coastal areas like Brunswick and New Hanover counties, but there are five in Wake County and three in Haywood County. Congress has capped flood insurance rate increases at 18% per year, so it could take several years for Risk Rating 2.0’s change to become fully effective in the most flood-prone areas. While the caps could be helpful right now, Hino said, gradual increases could lead to problems for some property owners. “You might be living in a house where your insurance is affordable right now and it might be for another couple of years, but it’s quickly going to get more expensive than you can tolerate,” Hino said, adding that homeowners need to know what their final cost of insurance will be once the full increases have taken effect. During the FEMA press call, Maurstad said premiums nationwide have been rising by about 10% annually for “a number of years.” In addition to offering the NFIP’s first-ever decreases, he said, premiums will stop increasing once the true risk level has been reached — a process he acknowledged could take five or 10 years in some cases. Flood insurance premiums for single-family homes will be capped at $12,125 annually, he added.
Is Risk Rating 2.0 more equitable?
According to FEMA, policyholders in less expensive homes have historically paid an out-sized portion of flood insurance policies. By considering the cost of rebuilding a home, FEMA hopes not only to better price risk but also shift the burden of premiums to the people who are more likely to submit high claims. “It’s aimed at fixing a longstanding imbalance in the program where because it was based on this antiquated system, many lower-value, lower-risk homes were paying too much and many higher-risk, higher-value homes were paying not enough,” Lightbody said. Risk Rating 2.0 also does away with a discount for insurance that FEMA offered after the first $60,000 of coverage was purchased. Hino, of UNC, said that discount historically meant that people with more expensive homes were paying lower rates for more coverage. “That’s no longer the case,” Hino said, “and so it’s less likely to be the case that the owner of a comparatively lower-value property would be paying more to insure than the owner of a higher-value property.”
Will this change who needs to buy flood insurance?
No. Under Risk Rating 2.0, owners of any buildings that stand within a FEMA-mapped special flood hazard area will still need to purchase flood insurance in order to secure a federally backed mortgage. Special hazard areas are defined as places that have at least a 1% chance of flooding in a given year. “The in-or-out determination will still be important for the lending institutions to determine which structures are required to have flood insurance under the current regulations, and it’s also still going to be used for floodplain management,” Garrett said.
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Previously reported – October 2021FEMA seeks comment on National Flood Insurance Program
Federal Emergency Management Agency officials are calling for feedback on the National Flood Insurance Program. The National Flood Insurance Program provides flood insurance to property owners, renters and businesses as well as works with communities required to adopt and enforce floodplain management regulations that help mitigate flooding effects, according to FEMA. FEMA is hosting two, 90-minute virtual meetings when the public can comment. The first meeting is 2:30-4 p.m. Thursday. Participants must register in advance on the webpage. The second meeting is from 3:30-5 p.m. Nov. 15. Register in advance online to attend or speak. The meetings will look at the program’s floodplain management standards for land management and use and an assess the program’s impact on threatened and endangered species and their habitats, FEMA officials said. Floodplain management is a community-based effort to prevent or reduce the risk of flooding. Published Oct. 12 in the Federal Register, the notice says FEMA officials want to hear from the public what updates are needed for the program’s minimum floodplain management standards to help communities become safer, stronger and more resilient, according to the agency. The agency also seeks input on minimum floodplain management standards to promote conservation of threatened and endangered species and their habitats, as consistent with the Endangered Species Act. In addition to providing verbal comments at the meetings, written comments can be submitted through the Federal eRulemaking Portal using Docket ID: FEMA-2021-2024. Click on the “Comment” button and complete the form. The comment period closes Dec. 13.
FEMA officials said that the type of feedback that is most useful to the agency:
- Identifies opportunities for the agency to improve the minimum floodplain management standards for land management and use.
- Identifies specific program components that promote conservation of threatened and endangered species and their habitats.
- Refers to specific barriers to community participation.
- Aligns the program with the improved understanding of flood risk and flood risk reduction approaches.
- Identifies better incentives for communities and policyholders, particularly for Endangered Species Act-listed species and critical habitats.
- Offers actionable data.
- Specifies viable alternatives to existing approaches that meet statutory obligations.
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National Flood Insurance Rates: the Tide Is Changing
Flood Insurance Presentation
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Previously reported – February 2022
The NFIP: Solving Congress’s Samaritan’s Dilemma
Lawmakers’ commitment to a subsidy‐free system has been imperfect from the beginning, and they have backslid in recent years.
Federal flood insurance arose as a policy device with two purposes: to reduce the use of post‐disaster congressional appropriations for disaster relief and to impose the cost of rebuilding on the owners through premiums. This has been partially successful. The percentage of pre‐FIRM structures receiving subsidized coverage has fallen from 75 percent in 1978 to 13 percent in 2018. But some degree of taxpayer subsidy remains and has recently grown. After Hurricane Sandy and subsequent FEMA flood map updating, Congress protected owners from rate increases by grandfathering structures so that they now pay rates that are below actuarially fair levels in relation to the specifics of their flood zones and the degree to which they are elevated above the floodplain. Moreover, enforcement of the elevation requirement is spotty at best. The appearance in recent years of private flood insurance may seem to be a hopeful sign that federal flood policy is moving toward something more consistent with the nation’s ethos. However, these insurers’ entry into the market appears to be the product of cross subsidies within the federal program, not an overall move to replace government protection with private insurance coverage. Once the overcharged properties have largely been moved out of the NFIP and in to private coverage, the remaining policies will likely be explicitly subsidized—either with direct aid following a disaster or with government subsidies to purchase private insurance. It is unclear whether that would be better than the current system. The existence of private flood reinsurance suggests that claims about the impossibility of private provision of flood insurance are incorrect. But even if that’s true, there is still the question of whether property owners who currently receive cross subsidies for their waterfront properties are willing to pay actuarially fair rates—and what happens if they do not and then are struck by floodwaters. The NFIP raises other important policy questions. Is the 50 percent “substantially damaged and substantially improved” trigger the right threshold to require property owners to elevate their buildings above BFE? What should be done about the poor enforcement of the BFE requirement? There is also the question of what—if anything—to do about structures that predate federal flood insurance, do not have mortgages, and do not purchase federal flood insurance. Ideally, these structures should present no policy problems at all: their owners are neither asking for nor receiving subsidy and are bearing the cost of their risk taking; moreover, the emergence of a private flood insurance market may provide them with products that they do find attractive. If neither they nor policymakers are time‐inconsistent on this arrangement, these property owners should be allowed to continue to choose and bear flood risks. But even they receive indirect subsidy through federal grants for local infrastructure following disasters. In short, the NFIP was an important decision by Congress to move away from providing ad hoc disaster aid to flood victims at taxpayer expense. But lawmakers’ commitment to a subsidy‐free system has been imperfect from the beginning, and they have backslid further from that in recent years. The NFIP needs to reembrace the goal of insureds paying actuarially fair premiums. Hopefully, the recent appearance of private flood insurers in the marketplace will help with this and not merely cherry‐pick cross subsidies in the current system. More hopefully, these private insurers will not suffer the financial wipeout that felled their predecessors a century ago.
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Previously reported – May 2023
FEMA Releases New Flood Insurance Rates by ZIP Code. Brace for Impact.
When the Federal Emergency Management Agency unveiled its new Risk Rating 2.0 methodology for calculating flood insurance, advocates and critics alike warned that it would mean higher premiums for thousands of property owners, especially in low-elevation coastal areas. Now, the full impact of the sticker shock is becoming clear, thanks to new data released by FEMA that shows price increases – and decreases – by county and by ZIP codes. But some spots will see decreases under RR 2.0, which is based less on FEMA’s much-criticized flood maps and more on a multitude of factors, including rainfall levels, elevation, a home’s distance from water, and rebuilding costs. Existing property owners won’t feel the pain all at once. Federal law limits the rate increases to no more than 18% annually on renewals. For people buying new policies, though, the full impact will be painfully obvious. For the past year, FEMA has required new policies to be rated under RR 2.0. He also noted that some prospective home buyers may not be aware of the soaring premiums. If the seller doesn’t explain about the new rating system, which grandfathers in existing owners, buyers could easily assume that their rates will remain the same.
The FEMA spreadsheet with all U.S. ZIP codes can be downloaded here.
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Previously reported – August 2023
FEMA’s New Rate-Setting Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform
FEMA’s National Flood Insurance Program is charged with keeping flood insurance affordable and staying financially solvent. But a historical focus on affordability has led to insurance premiums being lower than they should be. The program hasn’t collected enough revenue to pay claims and has had to borrow billions from the Treasury. FEMA revamped how it sets premiums in 2021—more closely aligning them with the flood risk of individual properties. But affordability concerns accompany the premium increases some will experience. We recommended that Congress consider creating a means-based assistance program that’s reflected in the federal budget.
What GAO Found
In October 2021, the Federal Emergency Management Agency (FEMA) began implementing Risk Rating 2.0, a new methodology for setting premiums for the National Flood Insurance Program (NFIP). The new methodology substantially improves ratemaking by aligning premiums with the flood risk of individual properties, but some other aspects of NFIP still limit actuarial soundness. For example, in addition to the premium, policyholders pay two charges that are not risk based. Unless Congress authorizes FEMA to align these charges with a property’s risk, the total amounts paid by policyholders may not be actuarially justified, and some policyholders could be over- or underpaying. Further, Congress does not have certain information on the actuarial soundness of NFIP, such as the risk that the new premiums are designed to cover and projections of fiscal outlook under a variety of scenarios. By producing an annual actuarial report that includes these items, FEMA could improve understanding of Risk Rating 2.0 and facilitate congressional oversight of NFIP.
Risk Rating 2.0 is aligning premiums with risk, but affordability concerns accompany the premium increases. FEMA had been increasing premiums for a number of years prior to implementing Risk Rating 2.0. By December 2022, the median annual premium was $689, but this will need to increase to $1,288 to reach full risk. Under Risk Rating 2.0, about one-third of policyholders are already paying full-risk premiums. Many of these policyholders had their premiums reduced upon implementation of Risk Rating 2.0. All others will require higher premiums, including 9 percent who will eventually require increases of more than 300 percent. Further, Gulf Coast states are among those experiencing the largest premium increases. Policies in these states have been among the most underpriced, despite having some of the highest flood risks.
Annual premium increases for most policyholders are limited to 18 percent by statute. These caps help address some affordability concerns in the near term but have several limitations.
- First, the caps perpetuate an unfunded premium shortfall. GAO estimated it would take until 2037 for 95 percent of current policies to reach full-risk premiums, resulting in a $27 billion premium shortfall (see figure below). The costs of shortfalls are not transparent to Congress or the public because they are not recognized in the federal budget and become evident only when NFIP must borrow from the Department of the Treasury after a catastrophic flood event.
- Second, the caps address affordability poorly. For example, they are not cost-effective because some policyholders who do not need assistance likely are still receiving it. Concurrently, some policyholders needing assistance likely are not receiving it, and the discounts will gradually disappear as premiums transition to full risk.
- Third, the caps keep NFIP premiums artificially low, which undercuts private-market premiums and hinders private-market growth.
An alternative to caps on annual premium increases is a means-based assistance program that would provide financial assistance to policyholders based on their ability to pay and be reflected in the federal budget. Such a program would make NFIP’s costs transparent and avoid undercutting the private market. If affordability needs are not addressed effectively, more policyholders could drop coverage, leaving them unprotected from flood risk and more reliant on federal disaster assistance. Addressing affordability needs is especially important as actions to better align premiums with a property’s risk could result in additional premium increases.
FEMA has had to borrow from Treasury to pay claims in previous years and would have to use revenue from current and future policyholders to repay the debt. NFIP’s debt largely is a result of discounted premiums that FEMA has been statutorily required to provide. In addition, a statutorily required assessment has the effect of charging current and future policyholders for previously incurred losses, which violates actuarial principles and exacerbates affordability concerns. Even with this assessment, it is unlikely that FEMA will ever be able to repay the debt as currently structured. For example, with the estimated premium shortfalls, repaying the debt in 30 years at 2.5 percent interest would require an annual payment of about $1.9 billion, equivalent to a 60 percent surcharge for each policyholder in the first year. Such a surcharge could cause some policyholders to drop coverage, leaving them unprotected from flood risk and leaving NFIP with fewer policyholders to repay the debt. Unless Congress addresses this debt—for example, by canceling it or modifying repayment terms—and the potential for future debt, NFIP’s debt will continue to grow, actuarial soundness will be delayed, and affordability concerns will increase.
Risk Rating 2.0 does not yet appear to have significantly changed conditions in the private flood insurance market because NFIP premiums generally remain lower than what a private insurer would need to charge to be profitable. Further, certain program rules continue to impede private-market growth. Specifically, NFIP policyholders are discouraged from seeking private coverage because statute requires them to maintain continuous coverage with NFIP to have access to discounted premiums, and they do not receive refunds for early cancellations if they switch to a private policy. By authorizing FEMA to allow private coverage to satisfy NFIP’s continuous coverage requirements and to offer risk-based partial refunds for midterm cancellations replaced by private policies, Congress could promote private-market growth and help to expand consumer options.
Why GAO Did This Study
NFIP was created with competing policy goals—keeping flood insurance affordable and the program fiscally solvent. A historical focus on affordability has led to premiums that do not fully reflect flood risk, insufficient revenue to pay claims, and, ultimately, $36.5 billion in borrowing from Treasury since 2005. FEMA’s new Risk Rating 2.0 methodology is intended to better align premiums with underlying flood risk at the individual property level. This report examines several objectives, including (1) the actuarial soundness of Risk Rating 2.0, (2) how premiums are changing, (3) efforts to address affordability for policyholders, (4) options for addressing the debt, and (5) implications for the private market. GAO reviewed FEMA documentation and analyzed NFIP, Census Bureau, and private flood insurance data. GAO also interviewed FEMA officials, actuarial organizations, private flood insurers, and insurance agent associations.
GAO recommends six matters for congressional consideration. Specifically, Congress should consider the following:
- Authorizing and requiring FEMA to replace two policyholder charges with risk-based premium charges
- Replacing discounted premiums with a means-based assistance program that is reflected in the federal budget
- Addressing NFIP’s current debt—for example, by canceling it or modifying repayment terms—and potential for future debt
- Authorizing and requiring FEMA to revise NFIP rules hindering the private market related to (1) continuous coverage and (2) partial refunds for midterm cancellations
GAO is also making five recommendations to FEMA, including that it publish an annual report on NFIP’s actuarial soundness and fiscal outlook. The Department of Homeland Security agreed with the recommendations.
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Previously reported – October 2023
Flood-Insurance Program Faces a Backlash—and a Deadline
Home-purchase closings could be derailed if it lapses
A federal program that provides critical flood insurance is set to lapse unless renewed by the end of the month, potentially stranding new home buyers in need of coverage. The National Flood Insurance Program provides a safety net for the increasing number of communities that are vulnerable to flooding and might not have access to any other coverage. Now lawmakers are deadlocked over extending the program, which is facing a backlash over a new pricing model intended to make premiums better reflect a home’s risk. “The only thing worse than what we have is nothing,” said Sen. John Kennedy (R., La.), whose bill to extend the program by one year was blocked last week. Congress may find a way to renew the program before it lapses on Oct. 1 or shortly after, as in years past, through legislation that is either separate from or part of the budget fight to prevent a government shutdown. The deadline comes at a critical juncture for the 55-year-old program. The Federal Emergency Management Agency is being sued by 10 states that want to block the program’s revamped pricing, which was intended to help address its decadelong funding shortfalls and to prevent homeowners in relatively low-risk areas from continuing to subsidize those in flood-prone ones. The new pricing will take several years to be fully implemented and result in rate hikes for two-thirds of the program’s 4.7 million policyholders, according to the Government Accountability Office. The states suing FEMA say the new rates could drive people out of flood zones, slam property values and even lead to people losing their homes because they can no longer afford insurance that is a condition of their mortgages. Average annual premiums will eventually more than double in 12 coastal and landlocked states under the revamp, according to a report this week by First Street Foundation, a research firm. The county with the steepest increase is in Louisiana, where the average premium in Plaquemines Parish will surge more than sixfold to $5,431 from $842 in coming years once the new premiums are in full effect, according to First Street. “Flood insurance policies have become their own natural disaster,” said Jeff Landry, the attorney general for Louisiana who is leading the states’ lawsuit. Other states where average premiums more than doubled include hurricane-prone Florida and Mississippi, as well as Kentucky, South Dakota and West Virginia. David Maurstad of the National Flood Insurance Program said that FEMA doesn’t have the authority to consider affordability when setting premiums but that the agency “continues to work with Congress to examine flood insurance affordability options.” Previously, premiums were based on an outdated model that FEMA said no longer accurately reflected a home’s risk of flooding. Critics said the cheap insurance encouraged people to buy pricey homes in flood-prone areas, in part by repeatedly bailing them out. More than 3,000 properties had 10 or more claims from 1978 through 2022, according to FEMA. Nearly two-thirds of those were in five states: Louisiana, Texas, New Jersey, Missouri and New York. To help shore up its funding, FEMA last year asked Congress to consider letting it drop coverage on properties that received four or more claim payments of at least $10,000. Congress has yet to take any action. Since the program caps rate increases at 18% a year, it will take until 2037 before the new premiums are being charged for 95% of current policies, the GAO estimated. That delays the full impact of rate increases for several years for policyholders but leaves the program with $27 billion less in premium revenue than it otherwise would have. Already, the program’s failure to charge adequate rates for years has dug it deep into debt. It is paying $1.7 million in interest a day to the Treasury on $20.5 billion in loans, even after Congress forgave it $16 billion of debt in 2017. Meanwhile, the program has lost almost a million policyholders since 2009, despite floods becoming more frequent and costly. In counties affected by Hurricane Idalia last month, fewer than one in five homes on average had federal flood insurance, according to an analysis for The Wall Street Journal by private insurer Neptune Flood. A failure by Congress to renew the program wouldn’t stop claims from being paid. But it could affect home purchases in high-risk flood zones and derail thousands of closings in the peak of hurricane season, according to the Insurance Information Institute, an industry group. In the last six years, lawmakers have allowed the program to lapse briefly three times, according to FEMA. It isn’t yet clear how lawmakers will try to extend the program. A renewal could be included as a provision in any temporary funding legislation to keep the government running. Sen. Kennedy of Louisiana is also expected to again try and pass his legislation for an extension. His attempt last week was blocked by Sen. Mike Lee (R., Utah), who said he wasn’t willing to agree to “yet another hollow promise” of reforms. “It’s a broken subsidy program,” Lee said.
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Previously reported – November 2023
National Flood Insurance Program: Reauthorization
Congress must periodically renew the NFIP’s statutory authority to operate. On November 17, 2023, the President signed legislation passed by Congress that extends the National Flood Insurance Program’s (NFIP’s) authorization to February 2, 2024.
Congress must now reauthorize the NFIP
by no later than 11:59 pm on February 2, 2024.
The Flood Insurance Program is Sinking:
The actual words of David Maurstad, the federal official in charge of the Nation Flood Insurance Program, were “the NFIP is not fiscally sustainable in its present form” when he spoke with reporters in late October. That may not be a surprise, but what hasn’t generally been reported is the wholesale reform package that the Biden administration has proposed to Congress.
First, some background. With more than 4.7 million policies, FEMA has borrowed over $20 billion to stay afloat and nearly ran out of money in September. Even with the much-maligned Risk Rating 2.0 NFIP premium increases, the program is struggling to deal with hurricanes and fires at a time when those disasters might be fewer in number but are increasing in cost. Given that background, the Biden administration has sent Congress no less than 17 proposals to overhaul the NFIP.
Here’s a short list of some of the most important points of this package –
- Requires communities participating in the NFIP risk reduction plan to establish minimum flood-risk reporting requirements for residential sellers and lessors.
- Allows for the use of replacement cost value in determining premium rates to “more accurately signal policyholders’ true risk.”
- Creates separate classes for coastal versus inland flood zones in the NFIP’s rate tables.
- Provides a means-tested assistance program for offering a graduated discount benefit for low- and moderate-income households.
- Prohibits coverage for new construction in high-risk areas and prohibits [presumably new] coverage for all commercial properties “to promote the growth of the private market….”
- Prohibits coverage for “excessive loss properties” or properties that flood repetitively and require insurance payouts of at least $10,000 each time.
These are obviously major changes, and there are more we haven’t listed. Congress has shown little interest in tackling NFIP reform, preferring to kicking the can down the road with two dozen extensions of the existing program. That means these proposals may be dead in the water. However, having to forgive over $20 billion in outstanding debt to the Treasury (which will happen next year or very soon after) plus inevitably needing to provide more billions to enable the program to stay afloat may be just the impetus Congress needs to face reality.
To be clear on why the can keeps getting kicked, there is no doubt that members of congress recognize the problem with the program – premiums are too low and do not reflect actual risk exposure carried by the program. Yet these same members are essentially held hostage by their voter bases to ensure NFIP premiums stay low. Because constituents simply do not want to pay more, supporting more expensive premiums (which reflect actual risk) puts members’ re-election on the line.
WATERLOG – November Newsletter