Federal Flood Insurance Premiums Far From Keeping Up With Expected Losses

Federal Flood Insurance Premiums Far From Keeping Up With Expected Losses

2021-02-22 16:02:16

If the nearly 4.3 million residential homes (1-4 units) across the country with significant flood risk were to be insured through the National Flood Insurance Program (NFIP), NFIP rates would have to be increased 4.5 times to reduce the risk cover today.

New research, The costs of climate, from First Street Foundation, a not-for-profit research and technology group dedicated to flood risk, quantifies the financial consequences of flood risks borne by U.S. homeowners, and how those consequences increase as flood risk increases & # 39; 39; s worsen due to a rapidly changing climate.

First Street Foundation researchers calculated the mean annual loss (AAL) statistics for each home in the contiguous United States, which is the dollar value of the damage associated with flood risk each year. The foundation found that while the total expected annual loss for the estimated 4.3 million properties at substantial risk this year is $ 20 billion, it grows to nearly $ 32.2 billion a year in 30 years – a 61% increase. – as a result of the impact of a changing climate.

These estimates suggest that the NFIP, which has lost more than $ 36 billion since its inception, will face increasing losses in the coming years without reforms.

"Quantifying flood risk in economic terms creates a new context for homeowners to understand their risk and for buyers to consider when evaluating a property," said Matthew Eby, founder and executive director of First Street Foundation. "Flood risks have real and potentially devastating financial consequences that are not priced in the market. We provide important insights into how flooding can affect the financial results of property owners, along with solutions that can make their greatest investment. to protect. "

The Foundation analysis was performed in part with home value data obtained from Come home by House Canary.

The Federal Emergency Management Agency (FEMA), which administers the NFIP, is working to change the pricing of flood risk at the level of individual property to more accurately reflect the risk of the current climate through the upcoming "Risk assessment 2.0"Initiative. The change to the FEMA rating will set new premiums for properties both inside and outside Special Flood Hazard Areas (SFHA) based on their individual flood risk.

However, that risk-based pricing has slowed. FEMA had initially announced that the new rates for all single-family homes would go into effect nationwide on October 1, 2020, but decided it needed additional time to extend its analyzes of the proposed rating structure to the entire book of business, so that it could include communities behind dikes. FEMA has postponed the implementation of Risk Rating 2.0 by one year until October 1, 2021.

The FEMA extension means that all NFIP policies – including single-family, multi-family and commercial real estate – can switch to the new classification system at once, rather than a phased approach as originally proposed.

Private flood insurers take a different approach to risk assessment and pricing and offer different limits and approvals than the NFIP.

Impact on the climate

The new report from First Street Foundation highlights the impact that climate change and a risk-based approach can have on individual homeowners. The 2.7 million properties at risk outside of the SFHA would need a 5.2-fold price increase to about $ 2,484 per year to cover their current risk. The 1.5 million properties within SFHA's, which are mandated to purchase flood insurance if they have a government-backed mortgage, would require an increase of 4.2 times, to $ 7,895 each year.

“If the necessary adjustments to premiums were made to accurately reflect property-level risk, the homes that previously benefited most from group-based subsidized rates would see their underlying value decline,” said Dr. Jeremy Porter, Head of Research and Development at First Street Foundation.

First Street Foundation has added dollar flood damage estimates for individual residential homes to its flood risk assessment tool Flooding factorThe new feature provides homeowners with estimates of flood damage based on the depth of the flood, shows how these costs will change from today to 30 years due to a changing climate, and provides a cumulative projection of the costs of flood damage over the years. typical life of a home. property, or a mortgage with a term of 30 years.

In previous research, First Street Foundation found that government-produced maps showing 8.7 million homes and properties at significant flood risk may have underestimated the amount of real estate at risk by 67%. Or, in other words, an additional 6 million properties are at significant risk of flooding. The nonprofit is making accurate climate change-adjusted flood scores available for every US property today.

NFIP Unchanged

The current rating structure of the NFIP has not fundamentally changed since the 1970s. It evaluates structures using their flood area on a Flood Insurance Rate Map (FIRM), the type of occupancy and the height of the structure. FEMA's nationwide classification system combines flood zones in many geographic areas and calculates expected losses for groups of structures that are similar in flood risk and major structural aspects, assigning the same percentage to all policies in a group.

Under Risk class 2.0, according to FEMA, no more flood zones are used in calculating the premium. Instead, the premium is calculated based on the specifics of an individual property, including structural variables such as the foundation type of the structure, the height of the lowest storey of the structure relative to the height of the base flood, and the replacement value of the structure.

Risk class 2.0 will also encompass a wider range of flood frequencies and sources than the current system, as well as geographic variables such as distance from water, type and size of the nearest water bodies and the height of the property in relation to the flood source.

Given the threat of sea-level rise, NFIP policymakers must rethink policies that encourage development in flood-prone regions, according to the R Street think tank in Washington, D.C.

R Street has suggested that the NFIP stop writing coverage for new construction in 100-year floodplains and that NFIP rates for each new construction should be adjusted to reflect future changes in flood risk assessments. The study, Do No Harm: Manage Withdrawal By Ending New Grants, says climate change will exacerbate the financial problem as sea level rise from what were once 1-in-100-year floods turns into 1-in-10-year or even annual floods.

Top photo: An aerial view from a drone shows people walking down a flooded street after Hurricane Sally passed through the area in Gulf Shores, Florida on Sept. 17, 2020. The storm came ashore with heavy rain and strong winds. (Photo by Joe Raedle / Getty Images)


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