Flood insurance is a prerequisite for federally backed mortgage loans for structures located within a floodplain (100-year or regional floodplain), also referred to as the Special Flood Hazard Area (SFHA). Flood insurance can be purchased by any property owner or renter in a community participating in the National Flood Insurance Program (NFIP), including over 500 communities in Wisconsin.
On July 6, 2012, the Biggert-Waters Flood Insurance Reform Act took effect and made significant reforms to the NFIP. The act creates stability and ends the succession of 17 stop-gap, short term extensions of the NFIP and its crucial flood insurance policies by extending the program for five years. The act seeks to bring financial stabilization to the NFIP, which has recently experienced six catastrophic loss years since 1995, each with a payout of one billion dollars or more, including Hurricane Katrina in 2005. But making the NFIP self-sustainable will lead to increased flood insurance premiums for some property owners in SFHAs. Many property owners have been paying low flood insurance premiums, especially those who had rates subsidized by the Federal Emergency Management Agency (FEMA) for many years. The act raises the rates for certain classes of properties to reflect the true flood risk. Rate changes to reflect actual flood risk are triggered at various points such as when flood maps are revised, when a policy lapses or when a property is sold.
New rates caused by assortment of factors
Different property owners may experience flood insurance premium increases over the next few years based on a number of different causes.
1. Subsidies phased out: The act requires FEMA to take steps to eliminate a variety of existing flood insurance subsidies. A subsidized policy is one that does not pay the full actuarial rate and is not reflective of the true risk of flood to that property. For structures built before FEMA-mapped floodplains or SFHAs on Flood Insurance Rate Maps (FIRM), the NFIP made flood insurance available at subsidized rates that did not include the true risk of flooding. These are called pre-FIRM properties. Only 20 percent of NFIP policies receive subsidies, and FEMA data indicates there are over 5,000 such policies in Wisconsin.
Insurance subsidies and discounts will be phased out and eventually eliminated for most properties in the future. Subsidies will be phased out for non-primary residences in an SFHA, properties that experienced severe repetitive loss, business properties in an SFHA, and properties that have incurred flood-related damages where claims payments exceed the fair market value of the property. Premium rates for these properties will increase 25 percent per year until they reflect the full actuarial levels reflecting the full flood risk.
Owners of primary residences in SFHAs will keep their subsidized rates until they sell the home, the policy lapses, the property suffers severe, repeated losses or a new policy is purchased.
2. Flood map revisions: Premium rates for other properties, including non-subsidized properties, will increase as new or revised flood insurance rate maps become effective. Weather patterns, erosion and development can increase flood risk while better science and technology provide more accurate definitions of flood risks. Flood risks and the costs of flooding change. These factors can all lead to flood map revisions. Premiums for properties affected by flood map changes will increase over five years at a rate of 20 percent per year to reach full risk rates, starting in late 2014.
3. New properties included in floodplain: As new maps are developed, it is possible that structures not previously located within an SFHA will be designated as such, and property owners will therefore be required to obtain flood insurance. Under the act, a new flood insurance policy may not be subsidized and, therefore, the owner will pay full risk rates.
4. New reserve fund assessment: Along with normal annual rate revisions, there will be a 5 percent assessment to build a catastrophic reserve fund. FEMA projects that overall premiums will increase an average of 10 percent beginning late this year.
What property owners should do
Talk to their insurance agents to see if their premium subsidized: Unfortunately there is no easy way to tell which properties are impacted by any of the new measures. A property owner’s insurance agent can help determine his or her specific situation. Property owners also can check the FEMA Map Service Center to view a map showing which zones the property may be located in at www.msc.fema.gov.
Have an Elevation Certificate completed: An elevation certificate verifies the elevation of the lowest floor of a structure relative to ground level. This is the only way to get an accurate picture of the actual risk and determine the correct rate. Flood maps cannot be appealed, but a property’s elevation and corresponding flood insurance rates can be corrected in the owner’s favor. See www.floodsmart.gov/floodsmart/pages/residential_coverage/questions_to_ask_your_agent.jsp.
Determine if the community participates in the community NFIP rating system: The Community Rating System (CRS) offers insurance premium discounts (up to 45 percent) for individuals in communities implementing floodplain management practices that exceed the minimum requirements of the NFIP. By implementing CRS floodplain management best practices, flood losses are reduced, public safety is enhanced, and the cost of flood insurance is decreased. Visit www.fema.gov/national-flood-insurance-program/community-rating-system.
Determine whether elevation grants are available to raise the property: FEMA provides hazard mitigation grants to states for activities such as structure elevation, property acquisition, and flood-proofing. When completed, these activities can reduce or eliminate risk, which may result in lower flood insurance rates. To learn more, visit www.fema.gov/hazard-mitigation-assistance.
Current NFIP flood insurance policyholders in SFHAs may be eligible for up to $30,000 to help pay the costs to bring the home or business into compliance with the community’s floodplain ordinance if the structure has been declared substantially damaged from a flooding event. This insurance coverage is known as Increased Cost of Compliance and can help pay the cost of flood-proofing, elevation, relocation or demolition.
Higher deductibles will help lower premiums.
Raise the building or flood-proof: One way to reduce future losses and premiums is to raise the building above the minimum required elevation standards or to flood-proof a non-residential building. The higher a property is, the lower the flood insurance rate. Other ways to reduce premiums may also include adding vents to enclosures, installing breakaway walls, or relocating the structure further from the flood source if possible.
The National Association of REALTORS® has been meeting with FEMA to express concerns regarding the impact these new rates and premiums will have on property owners and property transactions. There also have been legislative efforts in Congress to lessen the impact on property owners, but modifications have yet been unsuccessful.
Flood facts
- 52 percent of the U.S. population lives within 50 miles of a watershed.
- Flooding is the most costly and frequent natural disaster in the country.
- In Wisconsin, the primary cause of floods is excessive rain, snowmelt or a combination of the two.
- A structure located in a floodplain or SFHA has a 26 percent chance of being damaged by a flood over a 30-year mortgage.
Definitions
-
Floodplains: Lowland areas adjacent to lakes, wetlands and rivers that are covered by water during a flood. The floodplain is land that has been or may be covered by floodwater during the regional or 100-year flood. The floodplain includes the floodway and flood fringe areas.
-
Floodway: The channel of a river or stream and those portions of the floodplain adjoining the channel required to carry the regional flood discharge. The floodway is the most dangerous part of the floodplain — it is associated with moving water.
-
Flood fringe: The floodplain area outside of the floodway that is covered by standing flood water during a regional flood.
-
Special Flood Hazard Area (SFHA): FEMA terminology for the land area covered by the floodwaters of the base flood (100-year or regional flood) on NFIP maps. This is the area where the mandatory purchase of flood insurance applies. These areas are indicated on Flood Insurance Rate Maps (FIRMs).
-
Pre-FIRM: Structures built prior to the first identification of the property in a floodplain on a community’s Flood Insurance Rate Map (FIRM) are called “pre-FIRM” properties and their flood insurance rates are subsidized by FEMA.
Online resources
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.