Flood insurance rates rising

August 1, 2013

The National Flood Insurance Program (NFIP) is $30 Billion in debt. Flood insurance is about to change. What does it mean for you? And why are we in this predicament?


Flood poses a serious risk. It wasn’t until Congress created the NFIP in 1968 that property owners could purchase flood insurance and therefore finance expanded building in flood prone areas. Since then flood rates haven’t reflected the actuarial risk, which accounts for the current deficit. The program is changing to reconcile this financial imbalance, affecting many property owners in Plymouth, Cape Cod and the Islands as well as the rest of the United States (e.g., New Orleans, Mississippi River).

Government flood insurance

The NFIP created a host of acronyms: Flood Insurance Rate Maps (FIRM) to outline Special Flood Hazard Areas (SFHA) and to establish Base Flood Elevations (BFE). In layman’s terms, the maps tell what flood zone a property is in from A to V. Depending when a building was constructed it is either Pre-FIRM (built before the establishment of flood maps) or Post-FIRM (built after).

Many argued the federal government should never have entered the flood insurance business. Yet we have now come to rely on government-assisted flood insurance because private insurers can’t competitively provide this protection. Forty-five years later the federally backed NFIP program owes over $30 billion to the federal government. The NFIP is in debt for two primary reasons: the premiums charged were insufficient to properly cover the risks, and the United States has experienced an increase of flood claims.

One byproduct of the federal government providing flood insurance was increased coastal development with bigger and more expensive properties. You could say the federal government helped create its own problem by encouraging the construction of properties in areas prone to flooding by providing flood insurance. Without flood insurance, a property owner may not have received financing to construct their building. It would be too risky for a lender to write a loan. Aerial photographs from the 1930s-2000s along the coast reveal an exponential construction boom after the introduction of government backed flood insurance. That is, government-financed flood insurance enabled construction where it otherwise wouldn’t have been bank financed. The more development, the greater the damages when floods occur.

For the purpose of this article, it’s important to understand what constitutes a flood by the National Flood Insurance Program. It’s not a broken washing machine hose that leaks water for hours into your home, nor frozen pipes that burst and run for days while the property owner is away. The NFIP defines flood as: “A general and temporary condition of partial or complete inundation of normally dry land areas, at least two or more acres or two or more adjacent properties from overflow of inland or tidal waters or from unusual and rapid accumulation or runoff of surface waters from any source.

Flood insurance changes

To stem the NFIP deficit, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 and President Obama signed it into law July 6, 2012. The underwriting and rating of policies changed: previously subsidized rates are being phased out to help make the NFIP financially sound. The changes within this Reform Act are too numerous to outline in this article. Impact on property owners What does this legislation mean for property owners? That depends on where a property is located and when it was built. Pre-FIRM structures have enjoyed subsidized flood insurance rates because they were grandfathered. Non-primary Pre-FIRM homes will lose their subsidized rate and see 25 percent annual increases until premiums reflect the true flood risk. Post-FIRM (typically after 1974) were normally built with higher first-floor base flood elevations and will likely experience less disruption in their premium rating.

If you are a primary home owner and let your policy lapse, you will lose your subsidized rate if you apply to reinstate coverage – so pay your bills on time. Real estate values could decrease for Pre-FIRM homes. To secure financing, a buyer will have to purchase flood insurance and it could be very expensive with the new rates. No federally regulated bank, mortgage company or loan servicer can make, extend, renew or increase a loan on improved real estate inside a SFHA unless flood insurance coverage is in place for the life of the loan.

What you can do

Ask your insurance advisor what flood exposure you have and how the pending changes will affect you. Hire a civil engineer to provide you with an Elevation Certificate to determine your true risk premium. It will help you make an informed decision on how best to mitigate flood premiums. Increase your deductible; it will lower your premium. Raise your Pre-FIRM building above the Base Flood Elevation (BFE); this is expensive, however, it will reduce your flood premium and could pay for itself over time, plus make your property more marketable when you sell. Talk with local officials about community wide mitigation steps. You can contact your state about grants. FEMA’s Hazard Mitigation Assistance (HMA) programs provide funds for projects that reduce the risk to individuals and property from natural hazards (fema/gov/hazard-mitigationassistance). To learn more about flood risk and explore coverage options you can also visit FloodSmart.gov.

Originally written for the Cape & Plymouth Business Magazine (Flood Insurance)