Personal Insurance Blog

The Biggert – Waters Flood Insurance Reform Act, inspired by ‘bigger waters’ along the coast (not really), arose out of a desire to make the National Flood Insurance Program (NFIP) economically sustainable, and less dependent upon taxpayer subsidies. The removal of subsidies for about 20% of coastal properties, those in Zone A and Zone V, will be a costly transition for some property owners, though there are important timetables that limit the transition to non-subsidized rates.

The law passed and was signed by President Obama in 2012 without much fanfare, but now changes are looming (most scheduled for October 1, 2013). While political pressure is pushing to delay the changes, we believe property owners should prepare for these changes to take affect on schedule.  Many changes are beginning on October 1st, 2-13, some won't kick in until 2014.

Two important facts may help to understand how we got here. First, mapping technology has come a long way in the past several years, and rating precision has followed. The NFIP is able to quantify the chance and severity of future losses, and thus rate more precisely. This technology also means as coastal development and environmental factors (including floods) affect landscapes, flood zone maps can change as often as each year as well.  Mapping improvements are affecting people independently of many of these Biggert Waters changes.

The second fact is the NFIP is about $25,000,000,000 ($25 billion) in debt to the U.S. Treasury from past losses. The government wants their money back, and they don’t want to subsidize flood insurance rates any longer.  While the new rates aren’t calculated to recoup old losses, they do include the interest on that debt. Thus, subsidies are transitioning out of the flood insurance program, especially for homes built before the early flood maps in the 1970's.

The result: Rates for about 20% of flood insurance buyers are going up, and more people are now learning they live in a ‘flood zone’ as maps are updated. Scituate and Marshfield MA flood maps affect their towns particularly hard.  The greatest impact will be to property owners who had subsidized flood insurance rates: homes built prior to Flood maps (most South Shore towns, this means early 1970s)

Non-subsidized (risk based) rates won't happen right away. In and effort to transition to actuarially based rates, increases on existing flood policies will be limited to 25% per year until rates become non-subsidized. Flood policies with substantial increases coming (but subject to 25% / year increase limits) include:

1. Non-primary homes, meaning vacation or rental homes;
2. Properties with severe repetitive losses (paid claims greater than the market value);
3. Non-residential (e.g. business use) property.

Properties affected by map changes alone will be limited to a 20% annual ceiling on increases, and those won't take effect until 2014.

There are exceptions to the 25% ceiling increase transition rule, meaning when new fully risk based rates will take effect:

1. If you let your policy lapse (by not paying on time), fully non-subsidized costs will kick in right away.
2. ‘Grandfathering’ rules that used to be in place for property sales are phasing out starting in  2014.  In the past you could continue the rates of a prior homeowner; now non-subsidized rates will apply right away when buying a property from someone else.  One important exception: if a substantial upgrade was made in full compliance with local flood ordinances, grandfathered rates will continue (subject to written confirmation from building inspector).
3. If you make a substantial improvement to an existing property.  Although if improvements include becoming fully compliant with current flood ordinances,

Maps under the new law now include environmental sensitivity index mapping in an effort to promote green planning and rebuilding. This will include such infrastructure protection as dunes and other natural habitat that proved effective during Hurricane Sandy.

Some aspects are NOT changing.

If your town’s rates increased after 2008, you may still be eligible for a preferred risk policy (PRP). Call our office for details. One stated objective of the new law is to broaden the number of people who buy flood insurance, especially those in less vulnerable zones.

The NFIP has a monopoly on the pricing of flood insurance, but the underwriting, billing, and policy service functions are outsourced to insurance companies. So if you have a flood insurance policy serviced by Commerce, or Hartford or National Grange (to name a few that we use), remember it’s all still NFIP backing it… and writing the rules.

In spite of the NFIP monopoly on pricing, that doesn't mean there is nothing homeowners can do. One thing every property owner should do is engage a qualified engineer to provide an “elevation certificate” for your home. If your home is higher than the measured grade, the flood maps may not reflect its elevation properly; an elevation certificate can demonstrate the proper elevation above mean high tide (a primary rating factor). While it’s possible the elevation certificate might NOT affect your rate or even increase your rate, we believe it’s better to know this sooner, as you might be eligible for lower rates right away. In fact, the NFIP is requiring many policyholders to provide an elevation certificate to retain existing zone or rates. This is all part of the effort to achieve more precise rates for each property.

There are also coverage and deductible options for controlling your costs (although you may find your bank or mortgage company will weigh in on these options as well).

Lastly, as with other insurance, if you have a small loss, talk to us about whether it makes long term sense to file a claim. Repeat claims are a ‘predictive rating factor’, meaning they’ll charge you more going forward of you file a claim.

One last comment about flood insurance: the coverage is designed by, and the rates are calculated by the NFIP. They have a monopoly. They are not susceptible to consumer driven feedback. Coverage is limited (e.g. no coverage for items in the basement except house mechanicals such as the furnace). Don’t expect a lot from it. Instead plan for taking steps to secure your property as economically or safely as possible.

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