For nearly half a century, the federal government has backstopped the National Flood Insurance Program. The program helped real estate owners and assisted development in flood hazard areas by insuring homes and businesses. Protection comes at a cost, however, and a series of large storms beginning with Hurricane Katrina in 2005 and culminating in Hurricane Sandy left the flood insurance program $24 billion in debt and the federal government on the hook for the shortfall.
As a result, Congress made a series of changes to the Flood Insurance Program that will greatly increase flood hazard insurance premiums. The premium increases should have a longer phase-in to recognize the fixed and durable nature of real estate. The legislature should also act to secure discounts the program already offers.
The first change is the withdrawal of federal subsidies for flood insurance premiums. Prior to the act, the federal government partially subsidized flood insurance premiums for approximately 45 percent of policyholders in Connecticut. In an attempt to place more of the costs of the insurance program on those who own property in flood hazard areas, the premium subsidies are being gradually (or in some cases, not so gradually) withdrawn. Owners of subsidized policies on non-primary/secondary residences in a special flood hazard area will see 25 percent increases annually until rates reflect “true risk.” Owners of subsidized policies on property that has experienced severe or repeated flooding (whether a primary residence or not) and business/non-residential properties will see a 25 percent rate increase annually until rates reflect true risk.
Primary residences in special flood hazard areas will be able to keep their subsidized rates unless or until the property is sold, the policy lapses, the property suffers severe, repeated, flood losses; or a new policy is purchased. This means that purchasers of property in special flood hazard areas will be immediately subject to the new rates based on “true risk.”
Premium increases can be dramatic and flood insurance premiums in excess of $10,000 per year are not unheard of. In one Federal Emergency Management Agency example, $250,000 in coverage for a property 4 feet below the base flood elevation set by FEMA will carry a $9,500 per year premium while the same property located 3 feet above the base flood elevation in the same general area will carry a premium of $427. These premium changes are occurring against the backdrop of FEMA review of its flood hazard area maps. Reviewing and redrawing these maps will result in properties being included in flood hazard areas that had not previously been included and other properties placed in flood zones with higher risk.
Flood hazard areas are not restricted to the shoreline and can be designated along brooks, streams and rivers. The fact that a property has never experienced a flood does not necessarily mean that the property is not in a flood hazard area. Dramatic increases in flood insurance premiums may affect what a buyer is willing and able to pay for a property located in a flood hazard area.
There have been several bills in Congress to delay or at least ameliorate the increases. The Senate passed a bill to delay the increases for several years in some circumstances. That bill awaits action in the House. The recent omnibus spending bill prohibited FEMA from implementing increases on properties receiving grandfathered premiums when flood maps are redrawn until September of this year. The practical effect of this prohibition will delay those increases until 2015. In addition, FEMA has been criticized for applying shoreline flood models developed on the West Coast to ocean conditions on the East Coast. The claim is that the West Coast models exaggerate the extent of possible flooding when applied to the East Coast and is at odds with FEMA’s own published findings.
The program does have a community rating system (CRS) where municipalities can earn premium discounts for policy holders by engaging in certain specified activities and obtaining FEMA credit for those activities. Unfortunately, there are only 13 Connecticut towns currently in the CRS and only three of those have earned premium discounts in excess of 10 percent for their residents. Five of the 13 have earned no premium discounts.
It is both understandable and desirable to put the National Flood Insurance Program on a firm financial footing. However, real estate is an expensive, fixed, long-term asset, and it is difficult for the owners of such assets to accommodate sudden policy shifts. A four- or five-year time frame might be a long time in the world of finance, but it is a minute compared to assets that measure useful life in decades. Policy makers should consider some mechanism to fund the program shortfall over a term that more closely matches the useful life of real estate assets. At the same time, the legislature should consider encouraging and assisting towns to become part of the community rating system to earn premium discounts for their residents.