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Changes to the National Flood Insurance Program begin Jan. 1

The Biggert-Waters Flood Insurance Reform Act became law July 6, 2012 and was praised by the nation’s insurance industry for making changes to the insurance part of the National Flood Insurance Program (NFIP). But changes to flood insurance premiums may have homeowners asking county floodplain managers some questions.

The NFIP was created by Congress in 1968 as an integrated floodplain regulatory and flood insurance program. It is administered by the Federal Emergency Management Agency (FEMA). For many years, changes to the NFIP were directed at the mitigation side of the program and, in many ways, ignored weaknesses on the insurance side in favor of more politically expedient remedies, such as federal subsidies. The spate of damaging hurricanes, super storms and floods in the recent past has put the subsidy level at more than $20 billion.

The solvency and debt-reduction requirements imposed by the 2012 reforms, combined with the raising of the limit on annual premium increases to 20 percent, will result in increasing premiums across the board, across the nation, in all zones. But they will go up faster on properties that are in a special flood hazard area or below the elevation required for today's new construction. Those properties will also lose their subsidized grandfathered rates no matter when the policy was originally generated.

Other people who should be most attentive are owners of property that are in one of these categories:

  • Pre-FIRM rated — i.e., built before 1975 or before there was a flood insurance rate map (FIRM). Rate increases began Jan. 1, 2013 on second homes and will begin later in 2013 for businesses and primary residences that no longer qualify for the Pre-FIRM rate.*

  • Post-FIRM rated — all properties paying rates based on maps that have been updated and now show higher flood risk at that property. Rate increases will begin in 2014.

The NFIP was created with the intent of reducing future flood damage. Congress essentially made a deal with local governments, which can be summarized as follows:

  • Congress agreed to provide affordable (subsidized) flood insurance for properties that are already in harm’s way, and to insure newly constructed buildings at risk-based rates; buildings rated on risk would be allowed to keep their risk-class rate basis even if the true risk went up.

  • Communities wishing to have flood insurance available to their constituents agreed to regulate new construction such that buildings would not suffer damage in a flood of a certain magnitude. The benchmark flood was defined as the flood that has a 1percent chance of occurring in any year (also known as the 100-year flood). Communities agreed also to enforce a 50 percent rule, meaning they will treat substantial improvement and repairs as new construction when it comes to preventing future flood damage.

The insurance subsidy is provided by giving the NFIP authority to borrow from the U.S. Treasury when it cannot pay claims; the NFIP must repay the debt.

The changes enacted through the passage of the Biggert-Waters Flood Insurance Reform Act are a last-ditch attempt by Congress and the president to resuscitate a program that has been hemorrhaging money since 2005, when hurricanes Katrina and Rita walloped Louisiana and Texas. In the 2012 reform legislation, Congress requested a 10-year payback plan for that outstanding debt. By reducing the subsidies, the NFIP is hoping not only to reduce its current exposure to risk by bringing premiums in line with risks, it also hopes to further convince property owners and community leaders to restrict construction and other improvements in high hazard areas.