Federal flood insurance falls when new premiums take effect

Two people were killed in St. A state of emergency was declared in West Virginia. At least 37 people have been killed in Kentucky. More than 1,000 people were displaced in Death Valley National Park. All due to different floods, and all in the span of a week.

Flooding has claimed lives and disrupted communities across the United States this summer. But people are leaving the federal program more than ever, which is in line with the agency’s reforms that have changed the cost of living across the country.


What You Need to Know

  • The number of people with flood insurance has fallen by 9% between June 2021 and June 2022, due to the introduction of a new flood risk system that changed premium rates.
  • According to the state, 450,000 Flood Insurance policies have been canceled, and more than a quarter of those are in Florida.
  • In Oct. 2021, FEMA launched “Risk Rating 2.0” to update its pricing system; approximately 77% of policyholders expected to see their monthly premiums increase
  • Federal laws were introduced to establish federal flood insurance policies; however, such bills have not gained force

The number of flood insurance purchased has dropped by 9% in the United States in the past year, following the revision, called Risk Rating 2.0, which will increase the number of Americans by 3.8 million. As a result, hundreds of thousands of Americans may now be at risk of losing their homes and property with no way to get them back.

“In general, there are many factors that can affect the decline of people who have this plan, including financial problems caused by the epidemic, inflation, the housing market, affording or buying flood insurance in the market. Also, the National Flood Insurance Program often it sees growth in years following floods and declines in years without major events,” FEMA press secretary Jeremy Edwards said in a statement to Spectrum News. “Therefore, it would not be correct to directly link the loss of 500,000 policies to Risk Rating 2.0 – correlation does not cause.” Edwards added that FEMA believes that policies will increase, over time, under the new approach.

“I think it’s not crazy to think that people are getting cheap,” said Carolyn Kousky, vice president of Economics and Policy at the Environmental Defense Fund. Kousky is an expert on the intersection of natural disasters and economics, and recently wrote “Understanding Disaster Insurance” with the goal of creating awareness of disaster and insurance. He, like Edwards, cautioned that there hasn’t been a good study of why people are leaving the program in such large numbers, and he cited possible financial implications.

“I think where we’re seeing the most impact is the areas outside of the flood risk areas, which prior to the Risk Rating 2.0, saw good rates,” Kousky told Spectrum News.

According to federal data, there are 4.53 million active National Flood Insurance Policies (NFIPs) as of June 2022, the most recent monthly data available. But, according to the same, there were 450,000 fewer NFIPs in June 2022 than in June 2021.

The biggest change in policy holders in the last 12 months came in Florida, with 164,867 less federal flood insurance; Texas, Louisiana, California, South Carolina, New Jersey, North Carolina, Virginia, New York and Georgia round out the top 10 states that lost NFIP data between June 2021 and June 2022.

Congress enacted the National Flood Insurance Act in 1968 to provide flood insurance for areas with a high risk of flooding. Flood damage is not covered by standard homeowner’s and renter’s insurance. Instead, flood coverage — specifically catastrophic coverage, rather than pipeline events — is provided by the federal government, although a flood insurance market exists. These policies have become important to consumers, who often need to purchase flood insurance if they live in a high-risk area.

Since NFIPs were introduced, flood insurance premiums were primarily based on land located in and around Special Flood Hazard Areas – 100-year floodplains, which are areas with a 1% annual chance of flooding. This is possible until 2021, when the Federal Emergency Management Agency (which runs the NFIP program) introduced the Risk Rating 2.0 premium system.

Risk Rating 2.0 calculates the value of a property based on its actual flood risk, rather than the location within the flood zone. according to a federal report. Basically, it is a modern system that depends on the amount of flooding, the distance to the water source, the shape of the property and the cost of rebuilding. The legacy approach, meanwhile, only took into account the potential for heavy rain and river flooding.

In a April 2021 issue, FEMA said that Risk Rating 2.0 will “provide equitable pricing,” labeling the new practice “Equity in Action.” The agency said many people with low-cost homes pay more than they should, while those with expensive homes pay less.

“The new pricing system is the right thing to do. It reduces risk, provides equitable pricing and furthers the agency’s mission to reduce suffering after a flood,” said David Maurstad, director of FEMA’s National Flood Insurance Program.

But FEMA It seems that about 900,000 policy holders – about 20% of all – will drop their NFIP plans over the next 10 years. In a letter to Sen. Robert Menendez, DN.J., FEMA Administrator Deanne Criswell he said the analysis came in “a pre-financial model that was built using pessimistic thinking.”

In 2021 breakdown of monthly premium changes for each policy, FEMA calculated that 3.3 million plans, or 66% of the total, will increase to $ 10 per month; 522,430 policies (11% of the total) will increase significantly, and approximately 3,200 policies nationwide will increase by more than $100 per month.

On the other hand, the same calculation says that 1.16 million points (23% of the total) can decrease by about $ 86 per month.

According to the 2017 report published by Brink News99 counties – mostly along the coast – account for 75% of all NFIP residential plans, with the largest plans in five Florida counties, as well as Harris County in Texas and Jefferson Parish in Louisiana.

However, just because there are many policies does not mean that most families have insurance. In 2017, The Washington Post said that only 20 percent of homeowners had flood insurance in the areas most affected by Hurricane Harvey. A 2020 survey conducted by the Insurance Information Institute found that only 27 percent of homeowners who responded had flood insurance. And according to FEMA, about 40% of NFIP claims come from outside flood-prone areas.

While the number of NFIP policyholders has declined since 2010 (about 5.5 million, according to A 2010 report by the Institute for Political Integrity), the flood insurance market has grown. According to compiled by the National Association of Insurance Commissioners, there are at least 360,000 active private flood insurers in the United States as of 2021, the most recent data available. That’s an increase of about 130,000 over last year.

“I think that while we may see significant problems with properties outside of the Flood Hazard Areas, those that were not at Risk Rating 2.0 saw the best prices,” Kousky said.

People with insurance tend to recover better and faster than people without insurance, Kousky said, and people from lower-income families tend to benefit from that cushion.

But there’s a paradox: Those who need insurance the most are often the people who tend to be without it, as part of their cost-benefit analysis. Low-income families often need to save money, or cut back on spending on essentials, to help with disaster recovery.

Without insurance, low-income people have little access to credit (which they may not qualify for), government subsidies (which are often enough to secure a home) or other sources of income.

“There are going to be people with low incomes who are going to see a big increase in costs because of all of this,” said Bob Klein, a retired professor of risk management and insurance at Georgia State University. “I think giving them some kind of service, which can be paid for by taxpayers, is something you can forgive.”

The U.S. Government Accountability Office has looked into ways to provide aid, and lawmakers have tried to reform it. In 2021, Senator Bob Menendez, DN.J., introduced a Senate bill that would extend the life of the NFIP program, as well as authorize a means-tested program to help those with low incomes. The bill was last heard in committee on Aug. 4.

Spectrum News has reached out to Menendez for comment.

Regardless of federal regulations, the flood will continue, and rates in the private and public insurance markets will not fall.

“Insurance goes up when the risk goes up, and the only solution is, somebody has to pay,” Kousky said. “So that we can provide funding, it’s changing who pays but you can’t reduce the cost if the risk is high.”

And while Kousky praises the federal government for putting in more money, the climate is getting worse. “Frankly, climate change is making the risk of flooding worse,” Kousky said. “We’re going to have more flooding, more storms, and the program will see.”