More Need to Know: Flood Insurance

Courtesy of iii.org

National Flood Insurance Reform

 

In 2012 the Biggert-Waters Flood Insurance Reform Act was passed in an attempt to make the federal flood insurance program more financially self-sufficient by eliminating rate subsidies that many property owners in high-risk areas receive.

But in March 2014 Congress rescinded many of the rate increases called for by the Biggert-Waters Act. The new law reduced some rate increases already implemented, prevented some future increases and put a surcharge on all policyholders. The measure also authorized funds for the National Academy of Sciences to complete an affordability study.

The 2014 law prevents any policyholder from seeing an annual rate increase exceeding 18 percent. It calls on the flood program’s administrator, the Federal Emergency Management Agency (FEMA), to “strive” to prevent coverage from costing more than 1 percent of the amount covered. In other words, if the policy offered $100,000 of coverage, the premium would not exceed $1,000.

The 18 percent cap will result in refunds in some cases. Refunds began in October 2014. FEMA has a fact sheet on who is eligible for refunds.

The law also reinstates a practice known as grandfathering, meaning that properties re-categorized as being at a higher risk of flooding under FEMA’s revised maps would not be subject to large increases.

It also ends a provision in Biggert-Waters that removed a subsidy once a home was sold. People who purchased homes after Biggert-Waters became law will receive a refund. Many lawmakers in coastal states were concerned that the higher cost of flood insurance would have a negative impact on the real estate industry. The subsidy will now be covered by a $25 surcharge on homeowners flood policies and a $250 surcharge on insurance for nonresidential properties and secondary (vacation) homes.

According to data from FEMA, most current flood insurance policyholders (81 percent, or 4.5 million) pay rates based on the true risk of flood damage and so were not affected by Biggert-Waters or the subsequent rollback. Properties most affected by the rate hikes were in high-risk flood zones; were built before communities adopted their first Flood Insurance Rate Map; were second homes; or are second homes that have not been elevated. Others affected include businesses and those who live in homes that have been repeatedly flooded.

In June 2014 Florida enacted a law that encourages private companies to offer flood insurance. The legislation permits four types of flood coverage – a standard policy, which resembles National Flood Insurance Program coverage, and three enhanced policies. To encourage market growth, the law allows insurers to file their own rates until October 1, 2019. After that, rates will be subject to regulatory approval.

Flood Resilience

Disaster resilience refers to the ability of communities to prepare for, recover from, and adapt to adverse events.

Some of the best practices for community flood resilience recommended by the Environmental Protection Agency include: a comprehensive disaster recovery plan; green infrastructure techniques; land conservation in river corridors; restoring wetland vegetation; discouraging development in frequent flood areas; adapting flood resistant building codes; and coordinating with neighboring jurisdictions to implement a watershed-wide approach to storm-water management.

Urban planners and engineers around the world are developing innovative flood solutions such as amphibious housing, porous roads and sidewalks, and use of satellite data for more frequent flood alarms.

A 2017 National Institute of Building Sciences href=”http://www.nibs.org/page/mitigationsaves”>study found that for every dollar invested in riverine flood mitigation the return was $7 in cost savings.

Flood coverage in other countries

The system in the United States is unique in that for the most part the government underwrites the coverage and private insurers act as administrators bearing no actual flood risk.

In other developed countries, there are two basic methods of providing flood insurance. Under the first, the optional system, insurers extend their standard policy to include supplemental coverage for flood damage on payment of additional premium. The coverage tends to be expensive because only those most likely to be flooded, and therefore to file claims, purchase it, a situation known in the insurance industry as adverse selection. Among the countries with optional coverage are Germany and Italy.

The other method is “bundling.” Under this system, flood coverage is combined with coverage for other perils such as fire and windstorm, thus spreading the risk of flood losses across a large geographical area and greatly increasing the percentage of the population covered for flood damage. Countries that have adopted this method include the United Kingdom, Spain and Japan. In addition, in some countries such as France and Spain there are government compensation programs for major disasters, including flooding, that take effect when the cost of a disaster reaches a certain level.

In 2014 the United Kingdom launched Flood Re, a not-for-profit reinsurance organization to take on flood risks that primary insurers do not want. If an insurer calculates that the flood risk of a particular policy exceeds the flood premium, it will cede that risk to Flood Re. The insurer will pay the claim, then seek reimbursement from Flood Re. In all likelihood, Flood Re’s losses and expenses will exceed its premium. Additional funding will come from a levy raised from insurers by market share.