On October 1st, many residents living in flood-prone areas saw increases in their flood insurance premiums. The increases come as a result of the Biggert-Waters Flood Insurance Reform Act, which strengthens the National Flood Insurance Program (NFIP) and changes the way flood insurance premiums are calculated.
Residents of flood-prone areas are—with good reason—furious. The insurance premium increase will hurt housing prices and retard economic growth. Now, even some legislators who voted for the act are calling for a delay.
With such dire consequences, why did Congress pass the Biggert-Waters Act? The answer lies in history. In 1968, the NFIP was created because insurance companies did not believe flood insurance was profitable. Under the NFIP, flood insurance premiums were based on government assessments of communities’ flood map. For most communities, however, it took years before they were mapped and residents were offered discounted premiums. In the years following 1968, the population of shoreline regions grew by 40% to nearly 123.3 million people and the NFIP achieved its goal of creating a flood insurance market. However, over the years these discounted rates were grandfathered in, and FEMA, the organization that runs the NFIP, estimates that policyholders with discounted premiums are paying 40-50% of the market rate.
Ultimately, it was Hurricane Katrina—with help from Hurricanes Ike and Sandy—that rendered the NFIP unsustainable. After Hurricane Sandy, Congress increased the NFIP’s borrowing authority to $30 billion. So what’s in store for the NFIP and residents of shoreline regions?
NerdWallet turned to experts to find out.
- Resources for the Future Researcher Carolyn Kousky has helped create a plan to ensure a sustainable coast, while taking coastal areas’ affordability for low and middle-income families into account.
“This legislation is phasing out the discounts for many policyholders, raising questions about affordability for low and middle-income families. Of particular concern is the elimination of “grandfathering,” a practice whereby FEMA had previously let those households that are re-mapped into a high risk area keep their lower rates. As much needed updated hazard maps are rolled out in communities, some households are finding they are at higher risk of flooding than earlier maps indicated, and as such, flood insurance will cost more.
“The concern about higher rates has made some politicians seek to reestablish the original discounts in the program or slow down the phase in of higher rates. Risk-based rates, however, are essential for accurately communicating the risk of building in flood-prone areas. Still, it would be inequitable to make the high-hazard areas of the nation’s coastlines only an area the rich can afford. But the original premium discounts were never means-tested. One approach to keep low-income residents from being locked out of an important risk management tool that I have explored with Wharton School Professor Howard Kunreuther, is the use of an insurance voucher system, coupled to low-interest loans for investment in hazard mitigation.
“Without such a program, there is concern about how policyholders will react to higher rates. Flood insurance coverage is mandated for homeowners in a 100-year floodplain with a mortgage from a federally backed or regulated lender, but for others it is voluntary. The NFIP has always had to balance goals of increasing take-up rates for flood insurance with risk-based pricing. If higher rates mean homeowners drop coverage, this could leave them ill-prepared to handle a major flood event and increase the burden on governments post-disaster. Federal disaster aid, however, is unlikely to make homeowners whole again; insurance is needed to provide households with the funds to rebuild.
“Rates can be lowered by elevating the structure. This is occurring in many places along the New Jersey and New York coast impacted by Sandy. We may see this trend toward elevated structures continue in other coastal areas as new maps are introduced or in response to flood events. This could change the look of some coastal areas. We may also see people locate out of the highest risk areas with the highest costs of insurance. This could be done in a deliberate way to simultaneously restore coastal ecosystems that provide an array of benefits to residents and visitors.
“While the new maps and higher rates more accurately reflect the risk of flooding, they still do not address two important coastal hazards: erosion and sea-level rise. Many have recommended that NFIP rates should include the risk of erosion and the 2012 legislation instructed FEMA to consider sea-level rise. It is unclear how or when this will be done.
“Our coasts are beautiful places to live and visit and generate substantial economic activity. They are also inherently hazardous—and thus expensive to insure. Shifting this cost to the general taxpayer does not reduce the risk and may encourage excess development in the highest risk areas. We want households of all incomes to be able to enjoy our coasts and at the same time, we need to ensure an efficient and equitable distribution of the costs. As the sea rises and storm patterns change, coastal communities will need to reconsider building strategies and building location to manage the higher risks.”
- Southern Illinois Professor Nicholas Pinter believes Congress needs to address potential NFIP budget shortfalls.
“That legislation, Biggert-Waters 2012, is necessary but bitter medicine for the National Flood Insurance Program and holders of subsidized NFIP policies. On the one hand, BW12 closes some of the loopholes that have put NFIP nearly $25 billion in debt. At the same time, BW12 is a splash of icy water to homeowners and small businesses, some of whom will see crushing rate increases.
“We have a family here in Illinois that purchase a home on the floodplain last November, unaware of the looming legislation. As of Oct. 1, they are seeing their insurance rates rise tenfold. One could argue that they should not be living in that location, but how can we justify watching a family walk away bankrupt and homeless at the stroke of a legislative pen?
“And the larger issue with BW12 goes beyond its cold-heartedness. Congress passed BW12 as a no-cost solution. The only income source for NFIP is insurance premiums, and BW12 leaves current policy-holders on the hook for higher risk-based rates, payments into a “rainy day” fund for future shortfalls, as well as the programs ~$25 billion in past debt. Congress wrote the loopholes and imbalances that put NFIP into the present situation, and Congress should take responsibility for the resulting debt moving forward.”
- Drexel Professor Scott Knowles believes that the Biggert Waters Act will eventually be watered down.
“With the implementation of Biggert-Waters the government is no longer subsidizing lower insurance rates for second properties or businesses, or for what are called “repetitive loss properties.” It’s tough to see how this will ultimately play out. Politically you see two sides. The senators and Congressmen from flood-prone areas say that Biggert-Waters will destroy the property values along the coast in states like Louisiana. Proponents of the reforms, however, say that the NFIP as it was before reform was promoting a false economy–allowing people to take risks and not factoring the reality of those risks into realistic insurance premiums. The “bargain” disappears when the property is flooded and federal disaster relief is required. There will certainly be a short-term adjustment period before we can achieve a sustainable law. If I had to guess, I would say that those opposed to the Act may be somewhat successful in slowing down its implementation. Why? The construction and development lobby is one of the most powerful in the United States, and they have the ear of elected officials who may not want to slow development in hazardous coastal areas.”
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