Changes to Federal Flood Insurance Subsidies Cause Concern

Lost in the ongoing federal government shutdown is a recent change in flood insurance policy that could stunt the recovery of residents hit hard by flood damage, and negatively affect homeowners in federally determined flood risk areas.  On October 1st, 2013 the Biggert-Waters Flood Insurance Reform Act took effect and immediately began phasing out federal subsidies to flood insurance policies – causing many businesses and homeowners concern that they can no longer afford their coastal or floodplain property.

Home Insurance Does not Cover Flood Damage

A standard home insurance policy does not cover flood damage – a problem that is affecting thousands of residents in Colorado who are struggling to recover from last month’s flooding.  In Colorado, heavy rains and damaging floods caused over $2 billion in damages, and victims are discovering the recovery may be worse than the disaster as insurance policies provide little to no aid. 

The Federal Emergency Management Agency (FEMA) offers flood insurance through the National Flood Insurance Program (NFIP), however, even homeowners with a NFIP policy can face difficulty.  Some policies have coverage limits below the cost of the total damage, and all policies exclude from coverage any finished portion of a basement (finished walls, floors, and personal belongings).  Policy holders who purchase NFIP insurance are often unclear about what is and is not covered, leaving even those who believe they are prepared for a flood in a vulnerable position.

Federal Government Phasing Out Flood Insurance Subsidies

Adding to the problems faced by homeowners who own, or want to purchase, flood insurance is the recent federal cut of subsidies to NFIP policies.  The Biggert-Waters Flood Insurance Reform Act of 2012 eliminates subsides to 20% of policy holders who receive them – meaning premiums could increase significantly for families with an existing policy.  Taking effect on October 1st of this year, the subsidies for homeowners with flood insurance have already risen in some areas leaving homeowners, and their Congressmen, voicing concerns.

Further complicating the problem of rising NFIP premiums is FEMA’s authority to determine what homes must purchase flood insurance based on their location.  FEMA maps out flood danger areas and forces homeowners in those areas to purchase homeowner insurance , which, as premiums increase, could negatively affect homeowners who purchased their home without needing flood insurance and are subsequently required to purchase a policy. 

Despite objection, the Biggert-Waters Act makes economic sense – the NFIP deficit is a reported $28 billion, with storms such as Katrina, Irene, and last year’s Sandy costing the Federal government billions in claims.  Flood damage can be extensive, and therefore expensive, meaning that a private insurer would need to charge significant premiums for flood insurance in order to make the program profitable.  Even though the government does not offer subsidies to all policy holders, the NFIP did not collect nearly enough money from homeowners to afford to pay out the sizable claims left after coastal storms.  Although a benefit to homeowners in coastal areas, or other areas prone to flooding, the NFIP was, and to a large extent still is, an unsustainable program because widespread flooding damage costs too much money for a subsidized premium to cover.

The Future of Flood Insurance

As the Biggert-Waters Act takes effect, the upward trend in federal flood insurance premiums threatens the budgets of thousands of homeowners in flood-risk areas and leaves the future of flood insurance in flux.  Natural disasters such as coastal hurricanes, super storm Sandy, and the Colorado flooding provide dramatic reminders that homeowners without flood insurance can be left without resources for recovery, however, the practice of providing cheap flood insurance is economically unsustainable.

Naturally, Congress has bickered over the issue with some members arguing that the rate increases unfairly burdens businesses and homeowners, and others arguing that the NFIP cannot continue to operate at a substantial loss.  As with most issues, there is not a clear answer because, unfortunately, both parties are right – forcing Congress to choose which problem is more important.   Increasing rates will have a negative effect on people already living in coastal property, however, the NFIP is a massive economic burden on the federal government.  Solutions for these issues are mutually exclusive - either the subsidies provided by the NFIP exist and the program operates with a deficit of billions of dollars OR NFIP attempts to pay for itself by raising premiums to, or close to, a market rate calculated based on the actual risk of flooding and the cost of paying for flood damage which would force many people who could previously afford coastal or floodplain properties to reconsider their budget.

Because the Biggert-Waters Act is already in place, and because Congress currently has bigger fish to fry, it seems unlikely that the policy will change course in the near future.  However, as more residents begin to feel the sting of the rising cost of flood insurance, more members of Congress will be forced to pay the issue further attention and the debate could again take center stage.

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