Positive Changes in the National Flood Insurance Program

If you missed the big changes in the national flood insurance program last month you were not alone. As the country watches the Democrats and Republicans duke it out over the coming primaries some productive legislation happened with regard to flood insurance.

On July 6, 2012 President Obama signed the Biggert-Waters Flood Insurance Reform Act of 2012 extending the National Flood insurance program through 09/30/2017. The act is more than the usual kick the can of problems with the NFIP down the road for a few months or another year. This act overhauls the program which I hope puts the flood insurance program back on a strong financial footing.

One of the biggest changes in the NFIP is the phasing out of subsidized rates on properties with more than one loss. That might seem like common sense to most laymen but the concept has been lost on the NFIP for decades. We will see more dwellings that will be able to participate in the FEMA buyout program whereby high-risk locations with dwellings can be purchased and abated. FEMA will now be able to purchase re-insurance on behalf of the NFIP and be proactive in transferring risk. A mapping advisory council will be established to help FEMA modernize its flood mapping. This is crucial as many of the country’s high flood risk communities have inadequate mapping.  For the first time private insurance will be allowed in lending. In the past only government backed flood insurance was allowed in mortgage applications where flood insurance was required. Watch for greater rate increases in flood rates over the next several years as the NFIP tries to match rates to losses and become self supporting. One of the changes in the Flood Insurance Reform Act allows for an annual premium cap of 20% which will allow the NFIP to take greater rate increases. The deductible for flood insurance in preferred risk zones will be increasing from $1,000 to $2,000.

If you are getting the picture, flood insurance will become more expensive over the next several years and while consumers will not be happy, the changes will allow the NFIP to continue in the future as a legitimate insurance program and not a societal benefit that our country cannot afford. Without a government backed bailout after the Hurricane Katrina disaster of over $18 billion dollars the NFIP would have collapsed. As the program becomes more financially sound it should be able to better withstand future catastrophes and support an action plan to repay the debt to the US government.

Perhaps one of the most profound changes is an amendment introduced by Senator Roger Wicker (R – Mississippi) that uses data from the National Oceanic and Atmospheric Administration (NOAA) and FEMA to assess the cause of water damage following a hurricane. The point of this amendment helps determine water and wind damage faster and with greater accuracy. If you recall post Katrina it was the courts that were left to determine if a loss was due to flooding or wind driven rain. Now, dwellings that are damaged directly by wind driven rain can be routed to their homeowner insurance carrier and a faster claims response.

The Biggert-Waters Flood Insurance Reform ACT doesn’t resolve all of the NFIP issues for long term sustainability. However, with the caustic political environment in Washington it is refreshing to see a bipartisan effort to strengthen this very important federal insurance plan.