Insurance

Federal flood insurance falls as new premiums settle

Two people were killed in Saint-Louis. An emergency has been declared in West Virginia. At least 37 people have been killed in Kentucky. Over 1,000 were stranded in Death Valley National Park. All this following separate floods, and all in about a week.

Flooding has devastated lives and disrupted communities across the United States this summer. But people are dropping out of a federal program in greater numbers than before, coinciding with an agency overhaul that has changed premium rates across the country.


What do you want to know

  • The number of federal flood insurance policyholders fell 9% between June 2021 and June 2022, coinciding with the introduction of a new flood risk pricing system that adjusted premium rates
  • According to federal data, more than 450,000 national flood insurance policies have been dropped, more than a quarter of them in Florida.
  • In October 2021, FEMA introduced “Risk Rating 2.0” to modernize its policy pricing system; approximately 77% of policyholders should see their monthly premiums increase
  • Federal legislation was introduced to establish means-tested assistance programs for federal flood insurance; however, these bills have yet to gain traction

The number of federal flood insurance policies purchased fell by 9% in the United States over the past year, following a restructuring, called Risk Rating 2.0, which increased premiums by 3, 8 million Americans. As a result, hundreds of thousands of Americans are now at risk of losing their homes and possessions with no way to get them back.

“In general, many factors could influence this drop in the number of insured, including the economic impact of the pandemic, inflation, the housing market, affordability or the purchase of flood insurance on the private market. Additionally, the national flood insurance program typically experiences growth in years following major flood events and declines in years without major events,” said FEMA’s press secretary. , Jeremy Edwards, in a statement to Spectrum News. “Therefore, it would not be accurate to directly link the loss of 500,000 policies to the 2.0 risk rating – correlation is not causation.” Edwards added that FEMA is confident that policies will increase, over time, under the new methodology.

“I think it’s not crazy to think people are overpriced,” said Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund. Kousky is an expert at the intersection of natural disasters and economics, and recently wrote “Understanding Disaster Insurance” with the aim of creating an introduction to catastrophe risk and insurance. She, like Edwards, cautioned that there has yet to be a serious study of why people are dropping out of the program in such high numbers, and cited similar potential economic factors.

“I think where we might see the biggest impact is properties outside of the special flood risk zone, which prior to the 2.0 risk rating had seen favorable rates,” Kousky told SpectrumNews.

According to federal data, there were 4.53 million National Flood Insurance Policies (NFIPs) active in June 2022, the most recent monthly data available. But, according to that same data, there were 450,000 fewer NFIPs in June 2022 than in June 2021.

The biggest change in policyholders over the past 12 months was in Florida, with 164,867 fewer federal flood insurance policies; Texas, Louisiana, California, South Carolina, New Jersey, North Carolina, Virginia, New York and Georgia round out the top 10 states that lost active NFIP policies between June 2021 and June 2022 .

Congress established the National Flood Insurance Act in 1968 to provide flood insurance for properties with significant flood risk. Flood damage is generally excluded from standard home and tenant insurance. On the contrary, flood coverage—specifically coverage for catastrophes, rather than plumbing incidents—is largely offered by the federal government, although there is a market for private flood insurance. The policies have become a necessity for consumers, who are often required to purchase a flood insurance policy if they live in a risk area.

Since the introduction of NFIPs, flood insurance premiums were largely based on a property’s position in and around the special flood risk zone – the 100-year floodplain, which is an area with 1% annual risk of flooding. That’s until 2021, when the Federal Emergency Management Agency (which runs the NFIP program) introduced the Risk Rating 2.0 premium methodology.

Risk Rating 2.0 calculates a property’s premium based on its actual individual flood risk, rather than its location in flood prone areas, according to a federal report. It is essentially a retrofit system that depends on the frequency of flooding, distance to a water source, property characteristics, and cost of rebuilding. The legacy system, meanwhile, largely considered only the potential for storm surges and river flooding.

In a April 2021 press release, FEMA said the Risk 2.0 rating would “provide fairer pricing,” labeling the new practice “fairness in action.” The agency said many policyholders with lower value homes ended up paying more than they should have, while those with higher value homes paid less.

“The new pricing methodology is the right thing to do. It mitigates risk, provides fair rates and advances the Agency’s goal of reducing post-flood suffering,” said David Maurstad, senior manager of FEMA’s National Flood Insurance Program.

But FEMA would have estimated that no less than 900,000 insured — about 20% of the total — would drop their NFIP policies over the next 10 years. In a letter to Senator Robert Menendez, DN.J., Deanne Criswell, FEMA Administrator said the analysis came from a “pre-decisional financial model that was produced using pessimistic assumptions.”

In a 2021 breakdown of monthly premium changes by policy, FEMA calculated that 3.3 million policies, or 66% of the total, would increase by up to $10 per month; 522,430 policies (11% of the total) would face larger increases, and about 3,200 policies nationwide would increase by more than $100 per month.

On the other hand, the same calculations estimated that 1.16 million policies (23% of the total) would decrease by an average of $86 per month.

According to a 2017 report published by Brink News99 counties – largely located along the coasts – account for 75% of all NFIP residential policing, with the largest concentrations of policing in five counties in Florida, as well as Harris County in Texas and Jefferson Parish in Louisiana .

However, it is not because there is a large concentration of policies that the majority of households necessarily have insurance. In 2017, the Washington Post reported that only 20% of homeowners had flood insurance in the areas hardest hit by Hurricane Harvey. A 2020 survey conducted by the Insurance Information Institute found that only 27% of responding homeowners had flood insurance. And according to FEMA, about 40% of NFIP claims come from outside high-risk flood zones.

As the number of NFIP policyholders has decreased since 2010 (about 5.5 million, according to a Institute for Political Integrity 2010 Report), the market for private flood insurance has grown. According data collected by the National Association of Insurance Commissioners, there are at least 360,000 active private residential flood insurance policies in the United States as of calendar year 2021, the most recent data available. That’s a growth of about 130,000 over the previous year.

“I think where we might see the greatest impacts are properties outside of the special flood hazard zones, which prior to the 2.0 risk rating had seen very favorable rates,” Kousky said. .

Insured people tend to recover from a disaster better and faster than people without insurance, Kousky said, and people from low-income households are especially likely to benefit from this cushion.

But there is a paradox at play: those who need insurance the most are often those who tend to go without, as part of their personal cost-benefit analyses. Low-income households then typically have to dip into their savings or make hard cuts in spending on goods and items needed to recover from disasters.

Without insurance, people with limited incomes have little recourse outside of loans (for which they may not be eligible), government grants (which usually only cover enough to secure a home), or other means of raising money. funds.

“Some low-income people might see their premiums go up because of all of this,” said Bob Klein, professor emeritus of risk management and insurance at Georgia State University. “I think offering them some sort of relief, which would be taxpayer-funded, is something that you could potentially justify.”

The US Government Accountability Office has studied policy options for providing assistance, and lawmakers have attempted to implement revisions. In 2021, Sen. Bob Menendez, DN.J., introduced a Senate reauthorization bill that would extend the duration of the NFIP program and also authorize a means-tested program to help low-income policyholders. This bill was last heard in committee on August 4.

Spectrum News has reached out to Menendez for comment.

Regardless of federal legislation, flooding will continue and private and public flood insurance market rates are not expected to decline.

“Insurance goes up as risk goes up, and the only way to fix that is if someone has to pay for it,” Kousky said. “So we can cross-subsidize and change who pays, but you can’t make it cheaper when the risk is so high.”

And though Kousky credits the federal government with greater investments in infrastructure, extreme weather events are becoming more severe. “Frankly, climate change is making the risk of flooding worse,” Kousky said. “We have more flooding, more severe storms, and the program is going to see that.”