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Saturday, March 22, 2014

Biggert Waters Flood Insurance Reform Act: What does it mean for homeowners?

Biggert Waters Flood Insurance Reform Act
As global water levels rise, flood insurance costs also increase
By David Holly

The Biggert-Waters Flood Insurance Reform Act (BW-12) was passed in 2012 in order to induce FEMA (Federal Emergency Management Agency) and other associated agencies to change up some of the methods of operation of the NFIP (National Flood Insurance Program. The NFIP will be extended for another five years. Paramount changes of the Act include raising rates to reflect true risk, reorganization for more financial stability, grants, flood hazard mapping, management of floodplains and altering the dispersal tactic of updating policyholders. 

Overall, the idea here is to secure a level of financial security for the NFIP and more accurately reflect the true risk and cost of flooding for individuals and businesses in the nation. These changes plan to be phased into effect and have begun in 2012 when the Act was passed by Congress and signed by the President. There are some alterations to individual policies and premiums paid that have taken place as a result of the Act, and there has been conclusions drawn on the benefits and drawbacks of this significant program reform. Increases in premium rates for some policyholders are among the main controversial debates among the general public. 

Why was the Act passed and what cost/insurance rate changes have resulted

It all comes down to flooding, which has been a catastrophic risk to homeowners and business owners for many years. Insurance companies have abandoned the inclusion of flood insurance within their homeowners policies for a while now due to the costly mass claims that can arise form natural disasters and other flooding events. It was in 1968 that the issue was confronted by the US Congress by creating the NFIP as a federal program which facilitated property owners to purchase flood insurance. They could only purchase flood insurance if their community adopted floodplain management ordinances and minimum building code standards. The only problem was that a grandfathering in of existing structures that predated the standards polluted the true risk of flooding danger. As time passes the costs of insurance and the risks they attempt to cover increase accordingly, but when a system such as the NFIP does not increase premiums that emulate these increases, the system becomes inefficient and costly in itself. 

One of the major debates of the Act revolves around the rising premiums for some flood insurance holders. Many individuals have spiked concern about whether or not their premium cost would rise, but the reality is that only the subsidized policy holders will experience an increase. The increase is scheduled at 25% annually starting in 2012 and will continue to increase until these policies reach the rates of the standard full-risk premiums. Subsidies have been, for the most part, dropped as a means of catching the program up to the “true cost” of flood risk insurance. Unfair, not at all considering that around 80% of policy holders in the US are not paying rates that have been subsidized, which equates to nearly 4.5 million policies of only 5.6 million in play. Just as the debate with the taxing structure leans heavily on the concern of many paying the way for a select few, the concern of many here applies almost the same. Subsidized policy holders complain about the rising cost while the 80% who pay fully realized rates shoulder the load. This change is attempting to even the playing field for all policy holders while providing a realistic coverage for the actual potential risk involved.  

What does the Act mean for homeowners?

As mentioned before, approximately 80% of policyholders pay realized, full-risk premiums and these holders will not see the large increases mentioned above. Most all policyholders will, on the other hand, see a slight rise in their premiums which is due to the Reserve Fund assessment itself as sanctioned by the BW-12. The exception to the Reserve Fund assessment ding are those with Preferred Risk Policies (PRPs). Homeowners who fall within the 20% hat are working with subsidized policy rates are the ones that ill experience higher rises in premiums. 

Starting in 2012, after the Act was passed, these subsidies policyholders experienced a 25% increase in their premiums, followed by a steady rise each year thereafter until their policy costs catch up with the realized true cost being shouldered by the remaining 80% of policyholders. When the Act passed, roughly 5% of policyholders experienced an immediate increase in premiums because they fell into the categories of non-primary residences, businesses and repetitive loss properties. This was to catch up the policies by eliminating the non-essential subsidized policies first and giving the primary residence policyholders time to prepare for the increase in premiums. Homeowners that enjoyed a subsidized rate for newly purchased properties, new first time policies and lapsed policies will no longer be able to do so. 

Properties that are located within a Special Flood Hazard Area (SFHA) that were “grandfathered” in before their parent community adopted it’s first Flood Insurance Rate Map (FIRM), and have also not chosen to elevate their property to meet the standards after the remapping, experience the greatest chafe in rates. These are the properties that are below the current standard elevation for flood hazards. It is logical that changing the elevation of your home to meet newly established standards of elevation for flood hazard protection seems absurd, considering the costly expenditure necessary to do so. This is a major point of concern and backlash from property owners in these circumstances. 

Another major concern for homeowners is the uncertainty of what the “remapping” of the FIRM entails for their specific communities. If the elevation to protect against flood hazard rises after the reassessment, which is scheduled to occur in 2014, their rates will rise as a result. The uncertainty of how much that rise may be is an unnerving detail of the Act, as it should be. Another aspect of this is that for policies to reach the “full risk” rate, that includes rare catastrophic flooding events that may have occurred only once or twice throughout history in this nation for particular areas. The likelihood of a policyholder experiencing this during their lifetime is minimal and people are concerned as to why they should be responsible for such a low probability for a flooding disaster of such immensity given the infrequency. 

The concerns raised are legitimate but the reality we are seeing with policies, not only flood hazard insurance, is that the true cost of keeping the programs functioning is not realized. The same can be said for the true cost of transportation, utilizing natural resources such as water and even smaller public city amenities. Our nation has had a break in the costs, but as we begin to tip the economical scales in terms of our production and consumption rates, these costs begin to come out of the shadows as big financial issues which are only gaining ground. This Act is a pure example of legislation realizing that tightening up subsidized handouts may be coming to an end if capitalism is still to be pursued as the foundation our the nation’s economic model. 

About the authorDavid Holly is a professional writer and marketing consultant at CFL Insurance. You can visit him on Google+ to see more of his work.

Image license: US-PDGov