Flood Insurance Rates Escalating

Proposed legislation to delay increases would not affect second-home owners
The owners of waterfront properties like these along Soundview Drive and Captain Kidd’s Path in Montauk are seeing sharp increases in the cost of their federal flood insurance premiums. David E. Rattray

       Congress may soon provide relief to the owners of waterfront and low-lying properties here and across the United States who have been stunned to discover that their federal flood insurance premiums are rising sharply — more than doubling in some cases — thanks to a law that went into effect in October.

 The Biggert-Waters Flood Insurance Reform Law affects homeowners in designated flood-hazard zones who have been facing huge increases in the cost of insurance from the debt-ridden National Flood Insurance Program. The program is operating with a deficit of approximately $25 billion, reflecting an increase of nearly 50 percent since Hurricane Sandy.

       Under Biggert-Waters rules, flood insurance subsidies for homeowners in high-risk flood zones are being eliminated. At the same time, redrawn flood maps require many more homeowners to buy the insurance, which is often required by banks as a condition of a mortgage.

       The upshot is that premiums commensurate with risk, assessed by the Federal Emergency Management Agency, would at minimum and in most cases result in double or triple-digit increases for existing policy holders and high premiums for new ones.

       In a rare moment of Congressional bipartisanship, however, help, or at least temporary relief, may be on the way. The Homeowner Flood Insurance Affordability Act of 2013, introduced last week, would delay implementation of Biggert-Waters by four years. It would require FEMA to study ways to make flood insurance rates affordable and deliver a report to Congress. Congress would then be required to act on FEMA’s recommendations.

       “I think it’s got a good chance,” Representative Tim Bishop, a co-sponsor of the legislation, said on Tuesday. “This is something on which there is common ground,” he said, noting that similar legislation has been introduced in the Senate, also with bipartisan support. Passage, however, is likely to be months away, Mr. Bishop said. “I’m not sure how this is going to go, but there will be a significant effort to get this passed,” he said. Without the adoption of mitigating legislation, insurance brokers warn, the sharp increase in flood insurance premiums will negatively impact real estate transactions.

       For many homeowners on the South Fork, however, what is not included in the Homeowner Flood Insurance Affordability Act is significant: Its passage would not delay implementation of the Biggert-Waters reforms for second or vacation houses. “What it would do,” Mr. Bishop said, “is delay implementation for primary homes and for homes that have not previously filed claims. . . .”

       Properties in designated flood plains that carry federally backed mortgages are required to have flood insurance, with the National Flood Insurance Program usually the  insurer. “By and large, no insurance company will insure the perils of flooding on their own, so it’s the federal government that makes the market,” said Timothy Brenneman, executive director of Cook, Hall and Hyde in East Hampton. “Even if an insurance company is putting its name on a flood insurance policy, they’re just administering — it’s just not actuarially sound enough for an insurance company to be part of and bear risk.”

       Regardless of its passage, the Homeowner Flood Insurance Affordability Act reflects the consequence of recent extreme-weather events, which the scientific community has long predicted will become both more frequent and more violent, along with sea-level rise. Whether now or in four years, homeowners on the South Fork and in other flood-prone regions will bear the costs of the purpose of the Biggert-Waters legislation, which is to shore up the National Flood Insurance Program’s heretofore-unsustainable path, local insurance executives said.

       George Yates, president of Dayton Ritz and Osborn in East Hampton, said that recently changed flood zones had transformed many properties from low-hazard to high-hazard areas overnight. Parts of Wainscott and Sagaponack, he said, are an example. Premiums in designated high-hazard zones, he said, “might have been $450 for the maximum flood insurance available,” or $250,000 on the structure and $100,000 on its contents. Today, “I have one customer in that area whose premium will go to $7,000. . . . I’ve read of examples where the premium has gone up to as much as $40,000.”

       In the month since the Biggert-Waters legislation took effect, Mr. Brenneman had yet to see dramatic rate increases here. Some homeowners, though, are acting to obtain what is called an elevation certificate to substantiate their flood zones. “So far we haven’t seen any earth-changing increases. What we know is there will be major changes introduced over the next couple of years, and that they will impact second-homeowners in more flood-prone areas the most,” he said.

       Mr. Bishop also said he had heard little so far from constituents about flood insurance rate increases. However, he said, “The people concerned have every right to be.” 

       Like Mr. Bishop, Mr. Yates and Mr. Brenneman agree that reform is inevitable. The problem is how to soften the impact of modifying flood insurance rates to what makes actuarial sense. “What’s undeniable is the flood insurance program is woefully under-funded and that the number of flood events since, really, Katrina have put the thing into hopeless red ink,” Mr. Brenneman said. “There’s no question there needs to be different rates around it, but our feeling as brokers has always been that raising rates should be done in a consumer-friendly way, and that’s typically single-digit rate increases that are explainable and manageable and maybe even can be offset with changing deductibles. . . .”

       Mr. Yates likened the National Flood Insurance Program to “an insurance company that has no capital other than the full faith and credit of its parent organization, and has lost $25 billion, which is not an insurance company you as a shareholder would want to invest in.”

       But the precipitous rise in premiums, Mr. Bishop said, has to be mitigated somehow. The Biggert-Waters legislation, he said, “was a bipartisan effort to address a problem that was a significant drain on the federal budget.” At the same time, he said the increases “are simply way too high for the average homeowner to accommodate.” With the Homeowner Flood Insurance Affordability Act, he said, “We’re looking for some breathing room and some rationality to what the increase would be.”

       “Clearly,” Mr. Yates said, “people have to factor in the cost of insurance in costs for their home, and if you see flood insurance rates go to crazy numbers, it seems people will be less eager to buy homes that have higher carrying costs. It may have an effect on the real estate market. It’s not the primary driver — that’s more the U.S economy — but flood insurance, and windstorm insurance costs, are a big part of the package of carrying a home.”