From the April 2014 issue of Investment Advisor • Subscribe!

Postponing the Inevitable: Changes for Flood Bill Despite Early Support

Changes to the National Flood Insurance Program may be as changeable as the tides

In a rare bipartisan move, the Biggert-Waters Flood Insurance Reform Act was passed in 2012, hailed as necessary to save the National Flood Insurance Program (NFIP).

The bill was an attempt to make flood insurance premiums reflect the true risk of living in a flood zone and to end government subsidizing of rates that were often too low. It was also seen as a way to equalize coverage, since the low rates were thought to unfairly benefit high-net-worth owners and builders of luxury coastal homes rather than people who could lose everything in a flood.

But when the bill took effect in 2013, flood insurance rates skyrocketed, and many owners suddenly found their homes on newly redrawn flood zone maps.

Homeowners and business owners cried foul. Local officials worried that massive rate hikes would turn popular seaside communities into ghost towns, driving property values down and forcing people to abandon homes and businesses they could no longer afford to insure but were unable to sell.

That scenario wasn't all that far-fetched; many homeowners in formerly subsidized areas found themselves unable to pay the new rates and equally unable to sell their homes. Although some have been able to pay off their mortgages to avoid the requirement for flood insurance, doing without coverage in a hurricane-prone area is a huge risk.

As a result, a bill was drafted to postpone implementation and continue the subsidies that had put the NFIP so deeply in the red. In late January, the Senate passed a bill with bipartisan support to stall those hefty increases. In early March, a compromise bill passed by the House was sent back to the Senate, where it was approved on March 13 and sent to the White House for signature.

[Editor's Note: The bill was signed into law by President Obama on March 21.]

The Grimm-Waters Act, also known as the Homeowner Flood Insurance Affordability Act, rolls back a number of provisions of the Biggert-Waters Act. Annual rate increases have been limited to 15% for a class of properties, and 18% on individual properties. Homeowners who were paying subsidized low flood insurance rates have been grandfathered in; the bill also allows homeowners who paid those low rates to pass along their flood insurance rates to home buyers.

Homeowners who voluntarily sought flood insurance, who were required under Biggert-Waters to pay the full risk rate of a new policy, would no longer be subject to that provision. Instead they will be able to purchase a policy at the pre-Biggert-Waters rate. The Federal Emergency Management Agency (FEMA) must also refund the difference in premiums to policyholders who have already paid the higher rates.

Additional provisions of Grimm-Waters include putting the onus on FEMA to come up with alternative mitigation measures for communities where elevating structures is not feasible and to communicate the true level of risk. FEMA will also be required to ensure accuracy in its new flood zone maps and provide rate tables and underwriting guidelines at least six months prior to any rate increases.

The new bill, while addressing some unintended consequences of Biggert-Waters, does not solve the problems the original law was designed to prevent, the National Association of Mutual Insurance Companies (NAMIC) pointed out in a statement.

Jimi Grande, senior vice president of federal and political affairs for NAMIC, said, “This bill approaches the problems encountered during the implementation of Biggert-Waters in exactly the wrong way. It forces the vast majority of flood insurance policyholders to pay a little more so that those with subsidized rates can continue to pay less than what they should, whether they need assistance or not, and it wipes out important reforms that would ensure that the NFIP will be able to pay claims from future storms without a taxpayer-funded bailout.”

Grande said Congress should have addressed the problems of Biggert-Waters with “means-tested direct assistance or slower rate increases.” The new bill, he said, will “leave policyholders reliant on an unsustainable government program that will almost certainly need more money from the taxpayers after the next big storm.”

Grim waters indeed.

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