Flood Insurance Rate Increase Impacts SW Florida Real Estate Purchases
Buyers considering the purchase of a coastal Florida home need to be aware of recent changes in flood insurance coverage. Properties located in designated flood zones V, A (except AR and A99) or D are facing significant flood insurance rate increases over 2012 rates due to the change in federal subsidy reform.
Cash buyers don’t have to worry as they can self-insure for flooding. However, buyers in the designated flood zones who desire a mortgage will be required to provide an Elevation Certificate to purchase required flood insurance. The Elevation Certificate will determine the insurance rate for the property.
The rate increases and subsidy reforms are a result of the 2012 Biggert Waters Flood Insurance Reform Act (BW12), which was signed into law on July 6, 2012. The law significantly changes the federally administered National Flood Insurance Program (NFIP) overseen by the Federal Emergency Management Agency (FEMA) in its efforts to reduce subsidies for greater sustainability.
Many, but not all, of these subsidies will be phased out, starting with vacation or second homes in vulnerable areas.
Beginning on October 1, 2013, business structures and older primary residences that have experienced severe or repeated flooding gradually will lose their subsidized rates. Their premiums will increase by 25 percent a year until they reach the full-risk rate.
About 100,000 older primary residences in Florida will keep their subsidies in an attempt to ease the burden for those accustomed to lower rates, but they also face a 16-17% rate hike starting in October as part of an annual adjustment in premiums.
Properties purchased since July 6, 2012, when the reforms were signed into law, and those with lapsed policies face full-risk rates.
Insurance agents should help policyholders determine if their rate is subsidized. BW-12 Fact Sheets and Information can be found at www.FEMA.gov/BW12
A bi-partisan agreement has recently been made by congressman and senators to delay the legislation; however no date has been provided as to when pending legislation will be voted upon. The proposed delay applies to: primary, non-repetitive loss residences that are currently grandfathered; all properties sold after July 6, 2012; and all properties that purchased a new policy after July 6, 2012.
The National Flood Insurance Program (NFIP) was originally established by Congress in 1968 to decrease the U.S. government’s fiscal burden associated with flood disasters. Today, the NFIP provides coverage to nearly 5.6 million policyholders, with over 2 million policies in Florida alone. Large scale flood disasters and hurricanes in recent years have created a $25 billion deficit for NFIP.
In 2012, Congress decided changes to FEMA / NFIP were necessary to reduce this deficit by eliminating subsidies for properties in certain flood zones. FEMA regularly reviews a host of factors in determining flood risk, such as community rainfall, topography, tidal surge, flood mitigation measures, building development, community maps and flood history. Prior to 2012, over 13 percent of NFIP policyholders in Florida paid subsidized premiums that were significantly below risk-based rates. Homes built before communities entered the flood program and drew up floodplain maps in the early 1970s have received artificially low rates for decades; the federal government is now eliminating those subsidies.
Call for Action:
State lawmakers are now confronted with local governments, realtors, and private citizens calling for a resolution to the insurance dilemma of the impact of rates escalating five, ten or even twentyfold could have on people’s ability to sell their properties and on property values. A dramatic example: A Florida coastal home bought in August 2012 paid an annual premium of $500 in 2013 that rate will rise to $4,500. Realtors have noted that the sale of older homes have plummeted over the past month because of a provision in the law that makes flood rates immediately jump to full risk rate when a property is sold.
Florida Legislators have considered several alternatives in recent weeks, one of which is setting up a state-backed insurance company similar to Citizens Property Insurance Corporation. That hasn’t gained much traction which is understandable given the problems associated with the state-run insurance company.
This leaves the hope of luring private insurers to offer flood coverage as an alternative to the national program. This may not occur, considering the federal government entered the flood insurance business in the 1960s because private companies were unwilling to cover flooding. Many of the reasons private companies didn’t want to offer coverage back in 1968 have not changed: Risk is concentrated in particular areas, risk-based premiums would be too high for customers, and the claims that would be generated by a single catastrophe could bankrupt a company. Unlike other kinds of insurance, if one house floods, they all flood. Private insurers also remain concerned with political uncertainty, interference, and lack of rate flexibility at the federal and state level.
One thing that will lower flood risk is to make homes in low-lying areas safer, but such mitigation efforts are costly. Researchers have estimated it would cost about $58,000 to raise the elevation of a 2,000-square-foot home. For new construction, building codes address the elevation issue, but for existing properties, high flood insurance rates are to be expected.