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Risky waters for coastal homeowners
Legislative update
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Question: Which of these three natural risks is the most costly and prevalent in the United States?
A) Wildfires.
B) Tornadoes.
C) Flooding.
If you guessed C you are correct.
That’s right, of all natural risks, flooding is the most prevalent and causes more monetary damage per year in the U.S. than any other.
Compounding this problem is the fact that around 40 percent of the U.S. population lives in counties that border the ocean or Great Lakes and are directly or indirectly affected by flood risks. In fact, most U.S. counties contain rivers and streams that present flood hazards.
Additionally, 5.6 percent of the U.S. population lives in the highest risk coastal and riverine flood hazard areas.
Before 1968, most insurance companies excluded flood damage from homeowners insurance because only those most susceptible to flooding would purchase coverage. Recognizing this problem, Congress created the National Flood Insurance Program (NFIP) to make flood insurance available, identify flood risks and encourage local flood risk management.
The NFIP, which is administered by the Federal Emergency Management Administration (FEMA) and has been broadened and modified over the years, is designed to minimize and mitigate as well as provide insurance against the long-term risks to people and property from the effects of flooding
Another important function of the NFIP is to reduce the escalating cost of flooding to taxpayers. In the past NFIP has worked closely with insurance companies to market, sell, administer and adjust claims for policyholders.
This widely popular program is active in almost 22,000 communities in all states, with 5.6 million policies providing more than $1.2 trillion in coverage.
However, like many federal programs of its kind, the NFIP has never been financially sound. The primary problem facing the program is that 20 percent of policyholders, including many of the NFIP’s highest-risk structures in the coastal areas, paid premiums that were subsidized by the federal government in order to make them more affordable for policyholders.
According to their figures, on average, the NFIP has been absorbing 60 percent of the losses on these high-risk structures by providing subsidies for owners of homes and businesses built prior to the initial Flood Insurance Rate Map (FIRM) as well as those structures built in compliance with existing FIRMs that later experienced increases in flood risk.
Although NFIP collects more than $3.5 billion in annual premium revenue, they estimate that they need an additional $1.5 billion annually from subsidized policyholders to break even.
Recently the costs resulting from hurricanes Katrina and Sandy (the two costliest storms in history) have exacerbated the problem and NFIP now is $24 billion in debt.
In order to address this failing government program, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012. The law changes all the major parts of the NFIP, including eliminating subsidies to policyholders and increasing rates to more accurately reflect the real risk of flooding.
About 20 percent of policyholders, representing around 1.1 million NFIP policies currently pay subsidized rates
Changes from the Biggert-Waters law are being phased in over time.
On Jan. 1, a 25 percent annual increase in rates was assessed to non-primary/secondary residents in a Special Flood Hazard Area (SFHA) and will continue until rates reflect true risk.
And beginning Oct. 1, an annual 25 percent rate increase on business/non-residential properties and severe or repetitive loss properties in a SFHA was implemented until rates reflect true flood risk.
Also, any primary residence where a policy lapses or suffers severe, repeated flood losses or changes ownership will lose subsidies and move immediately to rates that reflect true risk.
Other parts of the law require FEMA to review, update and revise flood maps every five years based on current conditions. This brings about perhaps the most egregious part of the law — when a map is revised or updated, grandfathering will no longer be available even if the original structure was built to then-current recommended standards.
There are many other components to this law, but the intention is that insurance subsidies will be ending and rates will eventually reflect true risk and homeowners will be required to make structural changes to comply with current maps.
Congress has already enacted these changes but has done a poor job of grasping the impact it will have on real families.

Carter can be reached at 404-656-5109.

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