Flood Insurance Changes Could Spike Costs

As the Federal Emergency Management Agency works to compensate for more than 50 years of mispriced flood insurance, those likely to be hurt most are the ones least equipped to handle unexpected expenses – middle-class and low-income homeowners.

Scheduled to take effect in October is a major overhaul of FEMA's National Flood Insurance Program – the biggest change to the program's methodology since 1968. Experts say the recalibration of premiums will be representative of a structure's actuarial flood risk.

In other words, for the first time since Lyndon B. Johnson was in office, flood insurance premiums will reflect a home's individual, present-day risk.

The change is good for the country, the experts contend, but, in some cases, could be very bad for individual homeowners' wallets.

Across New England, tens of thousands of residential properties are considered to have a substantial flood risk – defined as having a 1% annual chance of flooding, or a "100-year flood" risk. It's a grim reality that will only be exacerbated as sea levels rise and climate change threats grow.

Anticipating FEMA's upcoming changes, New York-based research group First Street Foundation, in a major data release this week, estimated the impact on homeowners if flood insurance premiums were based on their property's actual flood risk, and the amount of money necessary to cover expected damages.

The results of those estimates show the potential for significant premium hikes for some New England homeowners with flood-prone properties.

"We need this program to come into place because it will actually incentivize us to make the right decisions as a country, but at the same time, we need to come in with our eyes wide open that we're going to have affordability issues," said Matthew Eby, executive director at First Street.

For someone owning a $10 million home, Eby said, an insurance jump from $3,000 to $10,000 may not necessarily impact them, "but if I have a $300,000 home and my insurance goes from $1,000 to $5,000, that is a huge price increase proportionally."

Those with the most expensive homes and highest risk are likely to see the largest premium increases, but for middle-class and low-income homeowners, even slight changes could have budgetary consequences.

Three Massachusetts cities located on the Merrimack River – Lowell, Haverhill and Lawrence – rank in First Street's top 10 communities in that state with the largest discrepancies between average expected loss and average premium in 2021.

In other cases, many policyholders' premiums could actually decrease or remain the same.

These potential rate hikes could result in some homeowners dropping their flood insurance coverage altogether if they're not required to keep it by regulations attached to their federal mortgage, leaving them vulnerable to shoulder the cost of flood damage on their own.

Experts say this outcome would be the consequence of years of FEMA "systematically underestimating flood risk," resulting in the National Flood Insurance Program's loss of more than $36 billion since its inception.

"On one hand, the change is welcome because risk-based pricing can give policyholders a true understanding of their flood risk and undo a lot of the damage the program has done subsidizing disaster for decades," said Deanna Moran, director of environmental planning at the Conservation Law Foundation. "On the other hand, insurance for some properties will become unaffordable. Some homeowners may be faced with a really problematic situation where they could be debating what to forgo to afford their flood insurance premium."

FEMA has not yet publicly released how its new "Risk Rating 2.0" will impact individual premiums, but First Street said its calculations are based on similar methodology to what the National Flood Insurance Program will use for its new system.

In a statement to USA TODAY this week, FEMA said entities like First Street "do not have insight into the Risk Rating 2.0 initiative."

"Any entity claiming that they can provide insight or comparison to the Risk Rating 2.0 initiative, including premium amounts, is misinformed and setting public expectations that are not based in fact," said David Maurstad, senior executive for FEMA's the National Flood Insurance Program. "While entities are free to suggest or estimate their opinion of what flood insurance premiums should be, they are offering exactly that – an opinion."

How is flood insurance currently calculated?

First Street says FEMA's flood maps were not designed to define risk for individual properties.

Currently, the program charges premiums based on the amount of insurance purchased for a home, rather than its replacement cost.

This means a $1 million home and $250,000 home with the same flood risk might see the same insurance premiums.

Ultimately, this has created a major disparity, experts say, because those who own the largest homes with the most flood risk should be paying their fair share. But leveling the playing field won't happen without major affordability issues for those already struggling to maintain flood insurance.

Impact on low-income,

middle class

While the National Flood Insurance Program tries to move toward a more equitable and solvent solution, Moran said Risk Rating 2.0 will "fall hardest" on these populations "who could really be priced out of their homes if they can't afford the premium increase."

In the city of Lawrence, which comes in last in Massachusetts for both per capita income and median family income, 15% of its housing stock with one-to-four units could see an average premium increase of 925%, according to First Street's estimates.

Its neighbor Lowell ranks No. 1 in Massachusetts for the largest discrepancy. More than 1,500 property owners there could see an average 1,543% premium increase to cover their actual average flood risk.

Meanwhile, both Lawrence and Lowell have large immigrant populations and high rates of poverty.

"I do worry most about low-income people and those families," said Cameron Wake, research professor in climatology and glaciology at the University of New Hampshire. "Their taxes are going up and then the NFIP has higher premiums, where are they going to go? It is important as we roll this out that we figure out how we keep these families of lower socioeconomic status in their homes."

Eby, of First Street, said for a city like Lowell, what's driving the discrepancy are properties located outside of the Special Flood Hazard Area that currently qualify for preferred rates, but still have substantial flood risk.

Combining the level of risk with the currently low premium rates, "you see huge percentage increases."

A Special Flood Hazard Area is where the National Flood Insurance Program's regulations must be enforced and where flood insurance has to be purchased by those with federal mortgages. However, many properties outside of a SFHA also have significant flood risk, noted Moran, and for that reason have historically received subsidized rates when homeowners do elect to purchase insurance.

Often times, homeowners who are still at great risk but live outside of a SFHA don't purchase flood insurance.

In Houston, Texas, after Hurricane Harvey, there was over $2 billion in damage and more than 70% of homeowners weren't insured, Moran said.

Can the affordability issue be solved?

In the small city of Ellsworth, Maine, located on the Union River, the median household income in 2019 was $53,324. Per First Street's estimates, 61 homes there could see an average 2,161% increase in their premiums – from just over $500 to more than $12,000 – if their actual risk was assessed.

That's the largest estimated increase in all of New England.

"How climate change will impact housing markets, especially for lower-income families and lower-value homes, is a big one," said Eby.

FEMA has said it is not empowered by Congress to address affordability, according to a recent Congressional Research Service report about Risk Rating 2.0. But then the question becomes, who is?

Prior proposals have sought to implement a means-test for premiums, Moran said, and "advocates and a lot of congressional leaders have really pushed for this for exactly this reason."

Congress could potentially take up the issue again – as FEMA in 2018 offered Congress options for an affordability program.

But in the meantime, FEMA has said rate hikes will be phased in for existing policyholders, and capped at an 18% increase per year.

"It's important we think about the environment justice aspect of this," said Wake, of UNH. "One of my big fears is as sea levels rise and precipitation rates rise, that the waterfront is only going to become the playing field of the rich. We need to think about broader goals here, how this is in fact going to shape communities."

Vermont – a New England outlier

In many places around the country, premiums would actually decrease, First Street estimates, like in Vermont, where they say several communities are currently paying too much based on their flood risk.

That's the positive piece of the puzzle, said Eby. While some middle-and-low income homeowners will certainly see their premiums increase, many will also see decreases.

First Street's estimates show many homeowners in the Vermont communities of Bennington, Barre, Rutland and Burlington would actually see their premiums lowered, if insurance rates were based on actual risk.

"With how it's structured today, a lot of homes are paying higher rates than they should be," said Eby.

Though a small number, 27 homes in the city of Burlington would see a hefty average 63.9% decrease in their premiums, First Street estimates.

Is Risk Rating 2.0 enough?

While FEMA's likely move to actuarial premium rates will be a welcome change after years of subsidizing, Wake said the program isn't taking into account the future impacts of climate change.

"The notion this big jump is going to be enough is incorrect," he said. "Masking the underbelly to all of this, FEMA, when it does assess risk, it does not look forward in time, it only looks backwards. They're finally updating this, but what's really important is they integrate some flexibility into the analysis, because we know the risk is changing, and the risk for flood is increasing."

Risk Rating 2.0 won't expand the areas where flood insurance is mandatory, added Moran. The Special Flood Hazard Areas will remain the same, despite more and more homes outside of it becoming at risk.

"Our flood risks are not getting better, they're getting worse," she said. "This won't address that the area subject to flood risk is exponentially increasing if we look out to 2050 and 2070. At the end of the day, we really should be sending more federal dollars to helping people relocate."

Find out about your home's flood risk

At floodfactor.com, the First Street Foundation created an online tool allowing individual homeowners to search their address and find out about past floods, current risks and future projections based on peer-reviewed research.

USA TODAY reporters Kyle Bagenstose, Dinah Voyles Pulver and Kevin Crowe contributed to this story.