Thursday, January 23, 2014

Can Flood Insurance Costs Be Controlled?

In 2012 Congress passed the Biggert-Waters law to enable the National Flood Insurance Program (NFIP) to recover from the verge of bankruptcy. This made sense as the wave of claims after Hurricane Katrina placed an impossible financial burden on the Program. Superstorm Sandy exacerbated the situation. But the financial recovery will be achieved by removing the subsidies that kept insurance costs low. While the need for making the NFIP self-sustaining is obvious, the effect on the subsidy removal on homeowners is huge. Take for example a New Jersey resident whose home suffered major damage when Sandy hit. His insurance premium, he was told, will rise from its current level of $1,000 to $8,000 or $9,000 in the course of the next 5 years. This is because his home is now considered to be in a high risk area. He can expect his flood insurance premiums to increase by about $1,600 every year until the final amount, which FEMA will estimate as the true coverage value, is reached. This kind of increase is expected to not just hit homeowners hard, but even to cause many of them to lose their homes.

The Homeowner’s Flood Insurance Affordability Act

This bipartisan bill was introduced to Congress on the anniversary of Superstorm Sandy and then reintroduced last month. It aims to place a freeze on the majority of flood insurance premium rates until such time as FEMA is able to complete a detailed affordability study and the accuracy of the results are scientifically verified. It also seeks for ways to be found to mitigate the huge burden that the expected major increases in insurance rates will place on homeowners.

Many in New Jersey are still struggling to get back on their feet after Sandy. The increase in flood insurance rates will make the recovery slower, if not impossible. If people are forced out of their homes, property values will drop and this in turn will have a major impact on the overall economic recovery after the natural disaster. In other words, not increasing insurance rates will destroy the NFIP. But increasing them may result in ruining the already damaged economies of the affect regions. But it need not be a lose-lose situation. The Homeowner’s Flood Insurance Affordability Act offers a road map of how both homeowners and the NFIP can remain protected, at least in the short term until the FEMS study is completed, verified and ways to counter the impact of increased rates are found.

The Way Ahead

The proposed legislation will exempt second homes, businesses and properties that are badly damaged or which are subject to repeated flood damage so as to reduce the claims burden of the NFIP and provide some relief to the program. Rates increases can be reduced or delayed. By this process, the number of homeowners who would otherwise drop out of the program should be substantially reduced. Any large departure of policy holders from the program will have a major negative impact on its already overburdened finances.

The need for effective and affordable flood insurance is not limited to only the coastal areas and the northeast. Every state has properties that are covered by the NFIP and so every state will suffer from the effects of rate increases. In turn, the economy of every state, to varying degrees, will be affected. The proposed legislation is supported by the National Association of Realtors, the National Association of Homebuilders, the American Bankers’ Association, the Independent Community Bankers’ Association and the National League of Cities among others.

Major increases in flood insurance premiums will cause many to lose their homes, other to leave the program and damage economies across the country. The passage of this bill offer both short term relief as well as the hope of a viable long term solution.


If you’re buying/selling a property and are wondering how NFIP is going to affect the property’s value, or have any questions related to your insurance, contact Allied Brokers at our website or call us at (650) 328-1000.

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