Flood insurance likely to be pricier after FEMA changes

A change in how the Federal Emergency Management Agency rates flood risk to individual properties means that nearly nine of 10 flood insurance policies in Texas will have premiums increase coming months, according to FEMA estimates .

FEMA says the change, known as Risk Rating 2.0, is necessary to reflect the real risks of flooding and more fairly apportion the costs among homeowners. The new rating system takes the costs of rebuilding a home into account for premiums, meaning owners of low-value homes will pay less, while owners of high-value homes will pay more.

Many members of Congress, meanwhile, have signed letters asking rate increases to be delayed while constituents deal with the financial impact of COVID-10 and Hurricanes Ida and Henri, which caused severe flooding from the Gulf Coast to the Northeast.

In Texas, about 660,000 of the state's 770,000 national flood insurance policies - 86 percent - will be hit with increases, according to FEMA . Most policies will see premiums increase by less than $120 a year; 22,000 policies will see premiums increase by more than $240 a year.

That's just in the first year after changes roll out. Annual premium increases are capped at 18 percent under law. Half of primary residences nationally would take five years to reach the premiums calculated by the new risk rating, according to a letter from U.S. senators, by which time, premiums would more than double.

About 40 percent would take 10 years, by which time, premiums would increase by more than fivefold, and 10 percent would take even longer. By far, Harris County leads the state for the national flood insurance policies, with roughly 320,000 policies in force.

Currently, premiums don't come close to covering the expenses of the National Flood Insurance Program, which was meant to be self-supporting. Instead, the program has repeatedly required taxpayer bailouts, meaning homeowners living in flood-prone areas have essentially had their risk subsidized by those living elsewhere.

"This is FEMA's effort to price flood risk in an actuarially sound way," said Michael Barry, chief communications officer at the Insurance Information Institute, an industry-funded consumer education group. "Right now, the program owes the U.S. Treasury billions of dollars."

Barry said it's unclear how higher flood insurance premiums that more accurately reflect risks will affect homeowners' decisions to live in areas likely to flood. "It's going to depend - (the costs are) going to be phased in over time," he said.

Unintended consequences

But members of Congress worry that instead of moving from flood-prone areas, homeowners will drop policies because of the higher costs. While lenders often require homeowners in FEMA-designated flood zones to have flood insurance, homeowners who have paid off mortgages or who live outside flood zones, but places with frequent heavy rains (like Houston) are free to choose whether to have flood insurance.

"It is our understanding that internal analysis shows that FEMA estimates roughly 900,000 policy holders (nationwide), or nearly 20 percent of policyholders, will drop out of the program over the next 10 years in large part due to unaffordable premiums under Risk Rating 2.0," wrote a group of nine senators in a letter to FEMA (neither Texas senator signed the letter)."This unwillingness to alter the current proposal, and the potential for having a significant increase in uninsured homeowners leaves Congress in the unfortunate position of having to pass more expensive, less beneficial disaster aid on the back end each time a devastating storm strikes and homeowners are left unprotected."

Thirty-eight members of the House of Representatives signed a similar letter calling for a delay in Risk Rating 2.0.

FEMA cast its change as a step toward a more equitable system, saying on its website that while rates since the 1970s had been based mostly on a property's elevation within different zones, the new system will also take into account factors such as flood frequency, the cause of the flooding (for example, heavy rainfall, river overflow or storm surge) and the cost to rebuild. It encouraged states, local governments and property owners to take flood mitigation steps such as regulating development and elevating homes.

"The (National Flood Insurance Program's) new rating methodology is long overdue since it hasn't been updated in more than 40 years," said David Maurstad, senior executive of the National Flood Insurance Program, in a release . "Now is the right time to modernize how risk is identified, priced and communicated."

In response to concerns about the pandemic's economic impacts, FEMA is rolling out new rates in phases: Starting Oct. 1, Risk Rating 2.0 rate hikes will apply only to new policyholders.

For the 14 percent of Texans who may see premiums decrease under the new system, those discounts will apply to policies renewed on or after Oct. 1. Policy holders whose premiums would increase under the new system will not experience those increases until they renew on or after April 1, 2022.

As the Risk Rating 2.0 phases in, even homeowners who don't have federally underwritten flood insurance policies will likely be affected, said Kurt George, vice president of strategy at the damage appraisal firm Property Damage Appraiser. "They'll follow suit," he said of private flood insurance premiums. "Because FEMA is providing the rationale."

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