Flood of new regulations hit homeowners

  • Wednesday, October 2, 2013

In June 2013, the Federal Emergency Management Agency (FEMA) issued the 2013 Specific Rate Guidelines to participating Write Your Own (WYO) insurance companies and other insurance partners to explain the National Flood Insurance Program (NFIP) premium rate changes that took effect Oct. 1. As part of these annual rate changes, this year FEMA will be implementing provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12).

This is going to affect anyone with property that does not meet the minimum flood elevation. That is about 30 percent of Isle Of Palms right now, and if they change the elevations, it will be more property affected. Downtown Charleston has the same problems.

Steve Peper, a Lowcountry Allstate agent said that the situation is a simple concept. “The National Flood Insurance Program is in debt to the tune of some $18 billion. For over 40 years the federal government has been subsidizing flood insurance premiums for low-lying or coastal areas,” he said.

“Last year, the government stopped kicking the can down the street and actually decided to address the problem. Biggert-Waters Flood Insurance Reform Act was passed last year and calls on FEMA to make several changes in the NFIP (National Flood Insurance Program).”

Those changes are:

• Return financial stability to program

• Change how the Flood Insurance Rate Maps updates impact policy holders, and the biggest change;

• Require that policyholders pay “true risk” flood premiums for “full risk” rating at current FIRM

“No one disagrees that the program needed to be fixed. However, it seems that the legislated five-year time frame with which to fix 40 years of losses was a bit aggressive,” Peper said.

The Specific Rate Guidelines historically have been used by insurers to calculate premiums for a variety of special cases that have a much higher risk of flood damage than typical - even within the Special Flood Hazard Area. Included in these rate guidelines are the rates for buildings where the lowest floor elevation is below the Base Flood Elevation (BFE).

The BFE is the flood level that has a one percent chance of being equaled or exceeded in any given year. In the past, many properties built below that base flood elevation, and before Flood Insurance Rate Maps (FIRMs) were adopted by communities, received subsidized premium rates which were artificially lower than true risk. Many of those subsidies were eliminated in the 2012 Biggert Waters legislation and therefore some of the higher risk policies previously receiving subsidies will be required to be rated according to the guidelines.

According to FEMA, the new tables and underwriting procedures in the guidelines reflect those mandated changes. In general, the subsidized rates were rated without using elevation data - knowing how high the lowest floor of the building sits above the base flood elevation. The law requires that policy ratings more accurately reflect the risk of each property’s true risk rate by eliminating the subsidies.

The Specific Rate Guidelines are a complex series of tables of rates and technical underwriting procedures which are used by insurers to calculate premiums for their policyholders.

Before they can use these tables of rates to determine premiums, insurers must first update and test their insurance rating software systems, which then become available to their insurance agents. That process can take several weeks.

“Will this affect my premium rates? Most assuredly, rates will go up for some - and since we live on the coast, most of our customer’s rates will go up, but some areas will be impacted greater than others,” Peper said.

“This is not just a “coastal issue.” We are currently seeing flooding in Colorado.”

Flood insurance premiums are based on a number of factors including the type of building, the number of floors, whether a building has a basement or enclosure, flood mitigation techniques, such as breakaway walls and flood-vents, the elevation of the lowest floor of the building and the property’s geographic location in reference to flood hazards identified by the community and FEMA.

The previous fix to this program dealt with subsidizing premiums or “grand fathering” homes that had been built prior to Dec. 31, 1974.

“You may have heard the terms ‘pre-FIRM’ and ‘post-FIRM.’ The new term is ‘current FIRM.’ The subsidies are gone and will not exist for future transactions,” Peper explained.

“This is not all happening immediately but will be phased in over the next several months and most importantly, the immediate impact will be felt by policy holders with subsidized premiums for “non-primary residences, businesses and structures with severe repeated flood losses.

“At the renewal of those policies, the increase is maxed out at 25 percent per year until they reflect true actuarial risk,” he added.

Subsidized premiums for policy holders of primary residences in Special Flood Hazard Areas will get to keep them until: the property is sold, the policy lapses, a new policy is purchased or the insured property suffers sever and repeated flood losses.

Increasing your deductible should favorably affect your premium - another consideration; lower your contents coverage on your flood policy. Peper said that regardless, you need to make sure you have a current Elevation Certificate. “If you don’t have one, get one. Most local engineering companies and surveyors provide this service. I see prices range from $350-$700 for the service. It is not difficult to obtain one.”

For more information, visit http://www.fema.gov/flood-insurance-reform-act-2012.

When will changes take effect?

Not everyone will be immediately affected by the new law. Subsidized premiums for policies covering non-primary residences, businesses and structures with severe repeated flood losses will have premium increases of 25 percent per year until rates reflect the full risk.

Other actions will trigger immediate rate subsidy elimination. Subsidized premiums for primary residences in Special Flood Hazard Area’s will be able to keep their subsidized rates unless or until:

• The property is sold

• The policy lapses

• The insured property suffers severe, repeated, flood losses where the owner refuses an offer to mitigate; or

• A new policy is purchased.

Why is this happening?

After 45 years, flood risks continue and the costs and consequences of flooding are increasing dramatically. In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act which calls on FEMA to make a number of changes to the way the National Flood Insurance Program (NFIP) is managed. Some of these changes have already been put in place, and others will be implemented in the coming months. Key provisions of the legislation will require the NFIP to raise rates to reflect true flood risk, make the program more financially stable and change how FIRM updates impact policyholders. The changes will mean premium rate increases for some - but not all - policyholders over time.

What this means:

The new law encourages program financial stability by eliminating some artificially low rates and discounts. Most flood insurance rates will now move to reflect full risk, and flood insurance rates will rise on some policies. Certain actions can trigger rate changes, as indicated above. Policyholders should talk to their insurance agent about how these changes may affect their flood insurance policy premium. There are investments property owners and communities can make to reduce the impact of rate changes.

Grandfathering changes expected in 2014

Prior to the Biggert-Waters Flood Insurance Reform Act, when revised or updated maps showed higher risk zones or BFEs, policyholders were permitted to “grandfather” and use the zone and elevation of an older map. The act phases-out grandfathered rates and moves to current risk-based rates for most properties when the community adopts a new FIRM. If a policyholder lives in a community that adopts a new, updated FIRM, grandfathered rates will be phased out and rates will reflect the most recent effective map. This will happen gradually, with new rates phasing in over five years. The premium example above may help homeowners anticipating map revisions to begin to plan for this change to the NFIP premium structure.

What can be done to lower costs?

For property owners:

• Talk to your insurance agent about your options.

• If you do not have one already, you will likely need an Elevation Certificate to determine your true risk premium and to make informed decisions about flood mitigation and rebuilding.

• Higher deductibles might lower your premium.

• Consider incorporating flood mitigation into your remodeling or rebuilding.

• Elevating or rebuilding higher will lower your risk and could reduce your premium.

• Consider adding flood-vents to your foundation walls or using breakaway walls.

• Talk with local officials about community-wide mitigation steps.

For community officials:

• Consider joining the Community Rating System (CRS) or increasing your CRS activities to lower premiums for policyholders.

• Talk to your state about grants. FEMA issues grants to states, which can then distribute the funds to communities to help with mitigation and rebuilding.

For more information:

For more information on Biggert-Waters 12 implementation, visit http://www.fema.gov/flood-insurance-refQrm-act-2012. For additional information about specific premium rates, contact your insurance agent. To learn more about flood risk and explore coverage options, visit http://www.FloodSmart.gov.

Steve D. Peper, with AllState

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