How homeowners can prepare for flood insurance increases

Tamara E. Holmes

If you live in a flood zone, the federal government has had your back -- but now you may be forced to carry your own financial weight.

Since 1968 the Federal Emergency Management Agency's FEMA) National Flood Insurance Program NFIP) has provided flood insurance to Americans for a subsidized, or discounted, price. But a new law that went into effect October 1, 2013 is putting an end to the savings for more than one million homeowners, some of whom could see their premiums jump by 25 percent this year alone.

flood insurance increaseNot everyone has subsidized policies. In fact, 80 percent of NFIP policies aren't currently subsidized, so those policyholders won't see a large premium increase.

However, that leaves 20 percent of about 5.6 million policyholders who will be experiencing rate increases over the next several years. For those who live in areas that are prone to flooding, flood insurance is a necessity since traditional home insurance policies exclude coverage for flood damage. Those who live in high-risk areas, officially called Special Flood Hazard Areas SFHA), are required to buy flood insurance in order to qualify for a federally-backed mortgage.

Purchasing flood insurance through private insurers can be costly and difficult to find, so FEMA set up the NFIP to provide flood insurance at an affordable cost.

But all good things must come to an end. Recent flooding disasters have left the NFIP strapped for cash. For example, the NFIP received about 143,000 claims averaging $43,000 from Superstorm Sandy, alone, the Insurance Information Institute reports. That and other disasters have led to the program amassing $24 billion in debt, making the NFIP unsustainable in its current form.

To eliminate the program's financial crunch, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012. Under the law, a number of changes will be made to how the program is run— including changes to how flood insurance premiums are calculated and the elimination of subsidies for many policyholders.

How much will my flood insurance premium go up?

According to FEMA, when flood insurance is subsidized, policyholders don't pay enough in premiums to account for their true risk of their home getting flood damage. The Biggert-Waters Act attempts to change that by ensuring that over time, policyholders take on their full share of the risk through higher premiums.

To determine the true risk, insurance agents use a number of factors such as the elevation of the property, whether a building has a basement and how close a building is to flood hazards that have been identified by FEMA.Some policyholders will see their rates rise immediately. Those who hold policies for a non-primary residence, such as a rental property, will experience a 25 percent annual increase starting this year and continuing until the premium reflects the true risk.

Those who have flood insurance policies for businesses and those who have experienced multiple flood-related losses in recent years also will start seeing the 25 percent annual increase immediately. In 2012, the average flood insurance premium was $650 per year. A 25 percent increase would add an additional $162.50 to the annual cost for a total of $812.50

If your flood insurance covers your primary home, you'll have a little bit of a reprieve. You'll be able to keep your subsidized rate until you sell the property. At that point, the new owner will be charged a higher rate that reflects the true risk.

While the higher flood insurance rates won't impact the value of your home, they may make your home more difficult to sell since potential homebuyers will have to have a budget that can accommodate both the mortgage and the higher insurance premium.

If you let your insurance policy lapse or buy a new policy for your home, you'll be immediately charged the true risk rate.

Protests surrounding the hikes

Naturally, homeowners who have subsidized flood insurance aren't happy about the rate increases, but a number of efforts have been launched to try to prevent or delay the changes.

  • Mississippi Insurance Commissioner Mike Chaney filed a lawsuit against the federal government to stop the rate increases, arguing that some property owners could see rate increases of more than 3,000 percent over time, and that the price hike could leave some homeowners bankrupt or no longer able to afford their properties.
  • There also have been efforts in Congress to delay the rate hikes. For example, U.S. Rep. Richard Nugent R-Fla.) introduced the Flood Insurance Fairness Act of 2013, which seeks to delay premium rate increases until FEMA conducts a study on the affordability of the higher rates.
  • Real estate professionals have complained about how the rate increases could hurt the real estate market. "At the request of [Florida] Gov. Rick Scott, Florida Realtors President Dean Asher spoke to the Florida Cabinet on Sept. 24 in Tallahassee about the federal Biggert-Waters Act and the unintended consequences Florida is seeing from parts of the Act," says Marla Martin, a spokeswoman for the industry association Florida Realtors. Asher told the state Cabinet that Florida had experienced 20 months of increased home prices, but the stipulation that homebuyers be charged unsubsidized flood insurance rates "will devastate Florida's economic rebound."
If you're looking for help in getting around the rate hikes, don't look to your state insurance regulator because there isn't much they can do since the Biggert-Waters Act is federal legislation, says Ashley Carr, a spokeswoman for the Florida Department of Financial Services, which oversees that state's Department of Insurance. For now, homeowners must wait to see how the legal and legislative challenges turn out. However, your state regulator can help you determine whether the law affects you and provide more information if you need it, Carr says.

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