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The NFIP (National Flood Insurance Program) is undergoing some significant changes as a result of passage of the Biggert-Waters Flood Insurance Act of 2012 (BW-12) and the Homeowner Flood Insurance Affordability Act (HFIAA) of 2014.
Standard insurance companies (i.e., for profit companies) had long refused to write flood insurance policies on structures built in areas known to be exposed to flooding. There is a technical insurance industry term used to describe this type of underwriting position; it’s called “common sense”. In stepped the government in 1968, offering to provide subsidized insurance on flood prone properties. The results were predictable; the NFIP was severely underfunded and has run significant deficits, especially recently following Katrina, Sandy and other recent flood events. The program has been hemorrhaging money and requiring bailouts and last minute congressional deals to keep the program authorized and funded, usually year to year.
Biggert-Waters was intended to strengthen the NFIP. It extends the program for five years while also requiring significant changes to all major aspects of the program including updating flood maps, revising the rules of the insurance program and increasing premiums to actuarially sound levels. In effect, the government is getting out of the business of subsidizing many folks who choose to build in areas that are predictably occasionally underwater.
All changes were effective with policies effective on or after April 1, 2015, so if you have a flood policy renewing after that date you’ll see them then. While some of the changes had to do with flood policies on residential properties, most of our readers will be chiefly concerned with changes affecting businesses, so we’ll look mainly at those. Businesses, secondary residences and severe repetitive loss properties don’t get a grace period and will see immediate changes in their formerly subsidized flood policies. Changes include:
• Flood zone maps are changing. That means buildings might now be in a flood zone that weren’t before, or they may now be in a higher-risk zone than before. The Federal Emergency Management Agency (FEMA) is updating maps throughout the country to reflect current flood risk.
• Grandfather status is being eliminated. Many buildings were formerly allowed to keep their original flood-risk rating even if the zone designation was changed on a later flood zone map. Now, all buildings will be rated using the most current maps.
• Flood insurance premiums are expected to increase. Current premiums are discounted and subsidized by the government, but government support for flood insurance policies is being phased out except for those covering primary residences. There will no longer be any support for commercial buildings, second homes and repetitive loss properties. Premiums could potentially increase by 25 percent per year for the next four years until the full-risk rates are reached. For the mathematically inclined that could mean an increase of almost 150%.
• Certain events will now cause an immediate increase in flood insurance premiums. The loss of subsidies and grandfathered status will be phased in over a four or five-year period. However, rates will immediately increase to full-risk rates if you allow a flood insurance policy to lapse, buy a flood policy for the first time, or buy a property in a flood zone.
In point of fact, in the past 5 years, all 50 states have experienced floods or flash floods. Over 20% of NFIP claims (and over 40% of total annual flood damage) come from areas outside recognized flood zones. Anywhere it rains, it can flood, and just a few inches of water from a flood can cause tens of thousands of dollars in damage.
If you are not in a flood zone insurance will still be inexpensive and available. If you are, expect to see your costs increase to a level that reflects your true exposure.