Potential Changes in the Flood Insurance Program

The National Flood Insurance Program, or NFIP, was already in deep debt, to the tune of $24.6 billion, before Hurricanes Harvey, Irma, and Maria, and Tropical Storm Nate hit our shores. Further complicating matters, the Congressional Budget Office, or CBO, is projecting a budgetary shortfall of $1.4 billion. Let’s examine what’s causing the budgetary shortfall and what the future implications are for the flood insurance program.

Budgetary Shortfall: The cause for the budgetary shortfall is due to the difference between how premiums are calculated for coastal counties versus inland counties affected by flooding from lakes, rivers, streams, and creeks. In short, the program doesn’t charge enough for flood insurance for properties in coastal counties to cover wave damage such as we experience in hurricane storm surge.

Storm surge accounts for 37% of all flood insurance claims. When this is added to hurricane related flooding claims due to rain (16%), tropical storms (5%), and nor’easter coastal storms (2%) it far outweighs inland flooding claims which total 36% of all flood claims. Adding to the unbalanced rates, flood insurance policies in coastal counties account for 75% of all NFIP policies. Unless something changes, the NFIP’s coffers will run dry soon.

Congress and the Trump administration are eyeing changes to the flood insurance program due to the budgetary challenges and outstanding debt the NFIP has. Here are a couple of ideas being considering.

Deny Coverage: Mike Mulvaney, the director of White House Office of Management and Budget, believes flood insurance should be denied to homes built in flood plains after 2020. Coverage for existing homes in a 100-year flood plain would be continued, but no coverage would be available for new homes constructed in these areas.

If this were to become law, homeowners will need to find private flood insurance which is usually more expensive than flood coverage from NFIP. President Trump has expressed similar statements where coverage would be denied for homes most at risk for flooding. As you can imagine, the National Association of Home Builders is opposed to this idea.

Cut Off Coverage: Mulvaney’s plan also provides additional powers to cut off coverage from properties which flood repeatedly. No details have been provided as to how many times a property would have to flood before being cut off, however, when it occurs, the homeowner would be forced to find private flood insurance if it’s available.

Raise Rates: None of the news reports have mentioned a rate increase. Most private carriers raise home insurance rates after major storms. Rates in north Texas for home insurance continues to climb due to the massive hail storms in 2016 and 2017. One easy way to slow the budgetary shortfall is to raise rates in areas in coastal areas. This is not an appealing solution for those who live in our coastal communities, but may help forestall the more drastic action of denying and cutting off coverage.

Rebuilding Changes: One group has proposed a plan allowing flood coverage to remain in effect for homes currently in flood zones if they were raised at least two feet above the flood plain. This is an expensive proposition for homeowners but may provide the best long-term alternative to owning a home that can’t obtain flood insurance.

What happens is anybody’s guess. What do you think should be done? Share your thoughts, experiences, and questions with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you.

Thanks!

Ed Wise

Wise Insurance Group

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