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Monday, April 05 2021

More than a million Floridians will see their flood insurance premium rise next year, FEMA said Thursday.

The good news is, most will see increases of less than $120 a year. The bad news is that homeowners will likely see annual rate hikes like that for the foreseeable future.

The National Flood Insurance Program, which underwrites most flood insurance policies in the U.S., is changing the way it calculates what each property has to pay. The new strategy, called Risk Rating 2.0, is meant to help pull the program out of its $20 billion debt and encourage people to live in safer, less flood-prone homes.

The new program will stop charging flood insurance premiums based solely on whether a home is within or outside of a flood zone and instead consider a range of factors like distance from the ocean, rainfall flooding and the cost to rebuild a home.

“It allows us to set accurately sound rates and communicate flood risk better than we ever have before,” David Maurstad, senior executive of FEMA’s National Flood Insurance Program, said in a press conference to announce the changes, the most dramatic change to the program in 50 years.

Starting April 2022, this pricing revamp will lead to higher prices for a majority of Florida’s 1.7 million policyholders — the most of any state — as well as a decrease for about 20% of policies, more than 340,000 policyholders.

For the million-plus who will see increases, about 68% of policyholders will see their premiums rise less than $120 a year. Eight percent, about 134,000 policyholders, will see increases as high as $240 a year. About 73,000 policyholders will see their annual rates rise higher than that, but still within the congress-set cap of 18% a year.

And that’s just year one. Rates will continue to rise every year at that 18% level until the annual insurance premium reflects the real cost of protecting the home, a figure that will be provided to homeowners along with the annual cost increases.

Andy Neal, chief actuary of the NFIP, said in the press conference that they expect half of the policies to be at their full, proper price in five years, with 90% of policies at full risk in 10 years.

“That last 10% takes us a good five years to get to a majority of it, and some will take even more of that,” he said.

This reflects one of the major findings of the Risk Rating 2.0 revamp: higher-value homes are generally underpaying for flood insurance and lower-value homes are generally overpaying.

The riskiest (and therefore most expensive) properties to insure are more likely to be homes that are expensive to rebuild, Neal said. That price, known as the replacement cost, is the same figure home insurers use to come up with premiums. Now flood insurance will do the same, which is likely to raise the cost of insurance for those homes.

“Larger increases are highly correlated with high replacement cost, but there are some exceptions,” Neal said. “This is an effort that’s about equity in pricing.”

Although most current policyholders won’t see a change in their rates until next year, on October 1 policyholders that are up for renewal can choose to switch to the new premium if it’s lower than their current one.

October 1 is also the date that this new method of pricing applies to new flood insurance policies.

Because FEMA hasn’t released much information about what that change might look like, advocates for affordable flood insurance are worried about the potential impact for the real estate market.

“We’re leery of how that’s going to touch us, because it’s never touched us in a good way,” said Mel Montagne, head of Fair Insurance Rates in Monroe, an advocacy group that aims to keep flood and home insurance affordable for residents of the Florida Keys.

Last time the NFIP was reformed, it sent premiums skyrocketing and ground real estate transactions to a halt in the Keys for months, before the changes were rolled back. Montagne recalled one $200,000 ground level home in the Keys that saw its premium jump to $20,000 a year.

“It was absolutely ludicrous,” he said.

However, the new Risk Rating 2.0 strategy appears to have some new protections to prevent the sins of the past. For one, congress’s 18% annual cap keeps premiums from rising overnight.

Under Risk Rating 2.0, the maximum for a single-family home’s annual premium would be about $12,000 a year, a number that could change going forward. Currently, there is no cap for a maximum policy, and Maurstad said the maximum annual policy price tops $45,000.

The NFIP is also maintaining most of its discounts, like the ones for properties newly mapped into flood zones. That will likely be important in Miami-Dade, where new draft flood maps will be released in May. In a county webinar last week, one snapshot of the draft maps revealed plenty of properties in the Little River area will soon be considered in flood zones, which means that flood insurance will be mandatory.

There will also be new discounts for homeowners who protect their homes by elevating them, install flood panels or elevate important outdoor equipment like their AC units.

Other NFIP discounts for homes built before FEMA’s building standards existed will also apply, as will discounts for cities and counties that participate in FEMA’s Community Rating Service, which offers big discounts on flood insurance to communities that guard against flood damage.

Miami Beach residents get a 25% discount under CRS. That used to only apply in full to residents in flood zones, which cover 93% of buildings in Miami Beach, but under Risk Rating 2.0 it will extend to every property in the city.

Amy Knowles, Miami Beach’s chief resilience officer, said that discount saves residents about $8.2 million.

“We do want flood insurance to be accurate, but as a coastal city we’ve got to be able to afford it,” she said. “We’re doing everything we can as a city to offset the cost of federal flood insurance.”

Making flood insurance more expensive is unpopular on either side of the political aisle, and Congress could step in to lower the 18% cap or force the NFIP to make more changes to lessen the impact of the suggested price hikes.

In 2019, all of South Florida’s U.S. House members from both parties, with the exception of Democratic Rep. Frederica Wilson, signed a letter to House leaders expressing concern with the proposed flood insurance rate changes.

“While FEMA intends Risk Rating 2.0 to provide more accurate and transparent flood insurance pricing, this untested proposal could lead to increased premiums, forcing homeowners to drop coverage, or even worse, lose their home,” the lawmakers wrote.

Reps. Mario Diaz-Balart, Debbie Wasserman Schultz, Ted Deutch, Lois Frankel and Alcee Hastings all signed the letter, along with former Reps. Donna Shalala and Debbie Mucarsel-Powell.

The letter also stated, “our constituents cannot suffer from a double-digit rate increase in addition to the fees and surcharges FEMA could impose on policy holders under Risk Rating 2.0.”

Diaz-Balart’s office said Thursday his position on NFIP rate changes is unchanged from the 2019 letter he signed.

“I worked with my colleagues across the country to push FEMA to lower the cap on annual premium increases and take into account how rate increases will impact regions like South Florida that are extremely vulnerable to climate change and hurricanes,” Rep. Debbie Wasserman Schultz said in a statement. “FEMA should be assessing flood insurance affordability for our region, especially during COVID.”

But risk experts say those high prices serve a purpose: pushing people away from vulnerable spots, a process that will only get more important as sea levels rise.

Del Schwalls, the immediate past chair of the Florida Floodplain Managers Association, praised FEMA for joining the private flood insurance market by charging customers the proper amount for their policies.

“I think this is exactly what we’ve been asking for, and at times begging for,” he said. “Now people aren’t subsidized into a false sense of security. If you tell them their risk is insanely high but they’re paying $1,200 a year, their gut tells them you’re wrong.”

As that $1,200 premium balloons to a $5,000 premium a decade down the line, Schwalls said homeowners might be more likely to consider elevating their home or other floodproofing improvements as a way of saving money.

Or, they might decide the risk is too great and move inland.

“When you get a policy premium that is equal to your risk, it informs your decisions,” he said.

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