Flood insurance premiums headed higher for ‘equity’

A new Biden Administration plan to make flood insurance rates promote “equity in action” could drastically increase premiums for luxury residences in coastal areas like Vero’s barrier island.

Based upon a national study of flood premiums, claims and property values as they relate to flood zones and risk of damage, the Federal Emergency Management Agency (FEMA) last week released the objectives of its Risk Rating 2.0 plan.

“The modernized pricing methodology corrects the current system’s unintentional inequities in which many policyholders with lower-value homes are paying more than they should and policyholders with higher-value homes are paying less than they should,” the FEMA press release states.

“As a result, nearly a quarter of the NFIP’s current policyholders will see a decrease in their premiums under the new pricing structure.”

“We are putting equity at the forefront of our work at DHS and making reforms to help our nation confront the pressing challenges caused by climate change,” said Homeland Security Secretary Alejandro Mayorkas.

“Risk Rating 2.0 advances those goals by fixing longstanding inequities in flood insurance pricing and creating a system that is better equipped for the reality of frequent flooding caused by climate change. These updates will improve individual and community resilience, reduce disaster related suffering, and ensure fairness. Risk Rating 2.0 is equity in action,“ Mayorkas said.

David Collins, vice president of operations for the Tom Collins Insurance Agency in Vero Beach, has been closely following the issue.

“FEMA’s National Flood Insurance Program (NFIP) reported being $20 billion in debt in late 2020,” Collins said on Monday. “It seems apparent that historical FEMA flood modeling methodology was not adequately matched with premium formulation, and reforms were needed.

“Flood risk can vary widely from home to home within any given neighborhood or flood zone. The expectation is that a more sophisticated approach of contemplating flood risk will make rates more aligned with reality and collect premiums needed to sustain the program.”

So, what should homeowners expect at renewal time, or when buying a home?
It’s unclear right now because FEMA hasn’t set the new rates yet. They will be phased in, for new policies beginning in October, and for renewals in April 2022.

“Based on the limited information we have, new rates will be a function of some combination of individual property risk characteristics such as historical flood frequency, distance to water, storm surge potential, and the home’s elevation, among others,” Collins said.

“Many of our private markets have already successfully implemented some version of this individualized property approach. Otherwise, we’re standing by for more specific information from FEMA and the NFIP regarding actual rate changes and what to expect for our coastal homeowners.”

Forbes magazine and US. News and World Report both published stories about what the plan might mean, Forbes’ putting a headline on its March 18 story that read, “FEMA’S Upcoming Changes Could Cause Flood Insurance To Soar At The Shore.”

“The Federal Emergency Management Agency (FEMA) has been preparing to drop a seismic climate-change bomb. Flood insurance premiums for millions of at-risk homes and businesses could surge as much as four times what they currently pay over the next few years when FEMA announces its ‘Risk Rating 2.0,’” the Forbes story said.

Referencing analysis by the nonprofit Fleet Street Foundation research group, the article cites predictions of significant rate increases for pricey properties in flood-prone areas.
The rate changes Forbes cited amount to the end of what insurance insiders refer to as the “beachside bailouts.”

“FEMA’s cheap flood insurance encouraged development and created a lucrative housing boom for realtors and contractors in often-flooded states such as Florida. Policies were renewed multiple times even after homes were damaged or destroyed. About one-third of Americans now live in coastal areas,” the Forbes article states.

The U.S. News story published March 13 also cited the Fleet Street analysis of the new rate methodology. “Nationally, First Street found about 4.2 million properties facing major flood risk, and those properties would need to pay about four and a half times more than the NFIP charges to cover that risk. About one in four of those properties are in Florida.

”Because of new federal caps, massive rate hikes will not all come in one year, but industry analysts say homeowners may face years of consecutive increases to bring the cost in line with projected risk – not unlike what has happened with windstorm rates. Ultimately, it may also impact property values and not in a good way,” the U.S. News article states.

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