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Flood Premiums Rising Dramatically

 

This page was first published in November 2012 as people in Louisiana, New York and New Jersey were recovering from Hurricane Isaac and SuperStorm Sandy. At that time, Congress had enacted legislation that removed premium subsidies and grandfathering; these changes were just beginning to be implemented and were not widely known. Recovery decisions needed to be informed about NFIP changes that would likely raise the future cost of ownership of the properties in which survivors were investing repair and restoration dollars. 

Much of the 2012 "Bigger-Waters NFIP Reform Act" was overturned by the 2014 "Grimm-Waters Homeowner Flood Insurance Affordability Act".  FEMA published this Overview of the 2014 legislation.

The 2012 legislation established two schedules by which discounted rates would be phased out: one for Pre-FIRM policies (rates increase 25% per year increase till rates reflect today's risk) and another for Post-FIRM Grandfathered policies (rates increase to reflect full current risk in five increments). Since the 2014 legislation restored grandfathering, this page now shows only the sample calculation of the 25% per year for Pre-FIRM buildings.

NFIP 2012 Reform legislation passed as Title II of the Transportation Bill (H.R. 4348) and was signed into law (PL 112-141) on July 6, 2012. It extended the NFIP for five years and made a number of changes related to improving the solvency of the NFIP, flood risk mapping (including mapping of levee protected areas), and flood mitigation programs. It raised the limit on annual premium increases to 20% (from 10%) and required FEMA to submit a ten-year repayment plan for the program's debt to the U.S. Treasury, most of which was incurred during the 2005 hurricane season, and it now includes debt incurred to pay claims in Super Storm Sandy. The solvency and debt-reduction requirements - together with the raising of the limit on annual premium increases to 18%-20% - virtually ensure that premiums will be going up across the board. But they will go up faster on properties that are too low in the flood zone and losing their subsidies.

See this EDEN page: NFIP and Reforms



Pre-FIRM and Grandfathered Rate Changes 

Since the beginning of the National Flood Insurance Program (NFIP) owners of buildings that found themselves too low in the flood zone through no fault of their own have been given a break on their flood insurance premiums. These properties have been insured by the NFIP, a federally run insurance program, at rates that do not reflect the true risk of flood damage. The policies are subsidized by the NFIP. The NFIP can borrow from the U.S. Treasury when premium collections are not sufficient to pay claims, but that loan must be repaid.

The no fault part of this condition means one of two things:

  1. The building was built before 1975 or before the community (governing jurisdiction) received its first Flood Insurance Rate Map (FIRM). These properties are insured at Pre-FIRM rates, unless the owner shows by an official elevation survey that the building is NOT too low and elects to be rated as Post-FIRM, based on elevation.
  2. The building was built Post-FIRM, in compliance with a FIRM, with a permit from the community, but a more recent FIRM shows the building to be at greater risk of flooding. Rates for these buildings have been grandfathered administratively, and allowed to keep the rate-class (flood zone and building elevation relative to BFE) that applied at the time of construction.

Under the 2012 legislation, discounted insurance rates were to be discontinued for all properties except Pre-FIRM primary residences that had not lost their qualification for the rate. (See How Residential Property Loses its Pre-FIRM Rating, below.)

  1. Pre-FIRM rates are being discontinued for all business properties and other buildings that are not the insured's primary residence. Pre-FIRM rates for insured properties were to expire with termination of an existing policy and would not available for a new policy on the property. Currently insured properties that no longer qualify for Pre-FIRM rates will see their premiums increase 25% per year until actuarial rates are achieved.
  2. Under BW-12, grandfathered rates would be discontinued, with increases toward actuarial rates being phased in over a 5-year period, 20% of the increase being added each year. The The March 2014 legislation (Grimm-Waters Act) restored grandfathering before FEMA began implementing this provision.

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How Residential Property Loses its Pre-FIRM Rating 

A Pre-FIRM primary residence will lose its qualification for Pre-FIRM rates under the following conditions and situations:

  • If, after July 6, 2012, the building is substantially damaged and the cost to restore it to its pre-damaged condition is 50% of the fair market value of the building before damage occurred. For substantial damage, the “cost” is the cost to restore the building to its pre-damage condition - even if you don’t plan to spend that much or to restore it fully. It also includes the cost of discretionary improvements you plan to make as part of the restoration project.
  • If the flood insurance claims history on the building meets one of the following criteria:
    • Total NFIP claims paid for flood-related building damage exceed the fair market value of the building
    • The property is a severe repetitive loss (SRL) property – A single family property with 1-4 residences is an SRL property if it has incurred flood-related damage resulting in four or more claims payments for building damage that exceed $5,000 each, OR, two claims payments for building damage that together exceed the value of the insured building.
  • If the owner of a repetitive loss property refuses an offer of mitigation assistance (to raise or relocate the building), including an offer under the Hazard Mitigation Grant Program (HMGP)  

Also, based on the 2014 Legislation

  • All policies will see a $25 surcharge (if the property is the insured's primary residence) or a $250 per year surcharge (if the property is used for any other purpose, including rental homes, camps, churches, business, etc.). The surcharge will continue until NO POLICY is being written with a Pre-FIRM subsidized rate.

The 2012 legislation said that Pre-FIRM qualification was lost upon sale of the property and that the buyer would immediately pay full risk-based rate. The 2014 legislation eliminated this "at-sale" provision and established that Pre-FIRM applies to the building, not the property owner.


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Sample Calculation - Loss of Pre-FIRM Rate 

Homes at BFE and BFE-4

This sample calculation is based on information provided in this FEMA Brochure, which includes the graphic shown here.

According to the 2012 Reform Act, when a property no longer qualifies for a Pre-FIRM rate the premium will go up 25% per year until actuarial rates are achieved. (2014 legislation maintained this rate for most categories but reduced it slightly for some.) This escalation could take many years.

Premium calculation is for $250,000 building coverage only (no contents coverage), for a single-family, one-story structure without a basement located in Zone AE at 4 feet below BFE (left) and at BFE (right). Rating is per the FEMA flood insurance manual dated October 1, 2012) and a standard National Flood Insurance Program (NFIP) deductible.

FEMA created this graphic to illustrate the premium savings earned by raising a building that is four feet below BFE up to BFE. The premium information, however, is useful also for demonstrating the effect of losing a Pre-FIRM rate, where the building is shown to be at BFE-4 on the newer map and has lost it's qualification for a Pre-FIRM rate.

The 2012 Reform Act discontinues grandfathered rating, allowing five years to convert to the rate appropriate for risk shown on the currently effective FIRM.  The 2012 and 2014 Acts require the property to be rated as a Zone AE property at BFE-4 feet. For the example property, a Pre-FIRM rated premium of $2,000 per year would be a reasonable estimate. The risk-based premium for BFE-4 (in the example) is $9,500.

The premium increases at 25% per year would look like this:

Annual increase (25% per year)
Current Pre-FIRM Premium (est.) $2,000
Year 1 Premium (25% over $2,000) $2,500
Year 2 Premium (25% over $2,500) $3,125
Year 3 Premium (25% over $3,125) $3,906
Year 4 Premium (25% over $3,906) $4,883
Year 5 Premium (25% over $4,883) $6,104
Year 6 Premium (25% over $6,104) $7,630
Year 7 Premium (25% over $7,630)

$9,537 or risk-based, if lower

FEMA began phasing out Pre-FIRM rates for second homes in January 2013. It has implemented rate increases for different building-use categories at various points and most recently implemented the 25% increase for "business uses" starting April 1, 2016.


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Plain Language - Links to Technical Resources 

Actuarial rates for flood insurance - As used here the word "actuarial" refers to the rate that would be charged a similar property that does not have a discount (break, subsidy). The word itself may have specified, broader meaning within the insurance industry. The changes imposed in 2012 by Congress appear to be intended to move the NFIP itself toward being more actuarially sound.

Base Flood Elevation (BFE) - The base flood is the 1%-annual-chance flood, commonly called the "hundred year flood." Base Flood Elevation is the water-surface elevation of the base flood. The depth of the base flood can be calculated by subtracting the ground elevation from the BFE. The probability is 1% that rising water will reach BFE height in any year; which compounds over a thirty-year period to 26% or more.

In the flood zone - This term is used by most people to mean the property is in the Special Flood Hazard Area (SFHA), as depicted on the Flood Insurance Rate Map (FIRM). The NFIP flood zones are A and V zones and sometimes have letters or numbers following the A or V (e.g. AE, AH, AO, VE). The officially adopted FIRM is the basis for all flood insurance rating. The community may be using a more restrictive map with broader flood zones and higher flood standards for regulating floodplain development. The community's regulatory map also may include allowances for increased runoff, subsidence, failure of dams and levees, or sea level rise, which are not reflected on the FIRM.

Too low- From an insurance-rating standpoint, "too low" means the elevation of the building is lower than the BFE.  Building elevation in the A-zones is measured at the top of the lowest floor. Elevation in the V-zones is measured at the bottom of the lowest horizontal structural member of the foundation. Enclosures that are lower than the living space may be considered the "lowest floor" in some circumstances; machinery and equipment located below the living space may raise insurance rates. The following resources may be helpful:
     NFIP Elevation Certificate with lowest floor diagrams
     FEMA Technical Bulletin 1-08: Openings in Foundation Walls and Walls of Enclosures

From a practical standpoint, "too low" means the risk of flooding is higher, a fact that has been concealed till now by artificially low (subsidized) insurance rating. The lower you are relative to BFE, the higher your risk of flooding. Being “too low” in the flood zone can cause hardship for the owner if the building is substantially damaged by fire, flood, tornado, earthquake or other event and must be raised before it can be repaired. The cost of raising the building usually is not covered by home owners insurance, but may be offset to some extent by the Increased Cost of Compliance coverage of the NFIP policy.

NFIP Community Status Book - Use this to find out which communities in your state participate in the NFIP, when they entered, and the dates of their first and current Effective FIRM.  Data are presented in Adobe PDF, comma separated values (CSV) text file, and HTML formats.

State NFIP Coordinators - maintained by the Association of State Floodplain Managers.  State coordinators will know their local floodplain administrators.

Bulletin to NFIP Insurers Regarding Implementation of the Reform Act and other Policy Matters - March 29, 2013.


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Last Updated:6/8/2016 5:01 PM
 

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