Written By Dolores Glass, ANFI, Communications Manager, Wright Flood

In 1968, Congress enacted The National Flood Insurance Program (NFIP) a federal program to share the risk of flooding, nationally, over a large pool of property owners, establish good flood plain management and help communities recover quickly after a flood event.  Private insurance companies were not offering flood insurance due to challenges with risk assessment, insurance regulation and marketability. 

Initially, to participate in the NFIP, a community agreed to enact flood mitigation building codes in high risk flood areas in exchange for the availability of flood insurance for all buildings in that community, regardless of risk. They established flood insurance rate maps (FIRM) to identify and evaluate risky areas and buildings and a rate structure to encourage participation to cover all buildings, regardless of their flood risk, in participating communities.  As technology grew and the water drainage patterns of a community changed, the flood maps were revised to maintain an accurate picture of the changing flood risk of the properties. 

The resultant NFIP flood insurance premium rate structure evolved to include, among other criteria:

• Risk-based premium rates for new construction in high risk flood zones based on an Elevation Certificate. 
• Preferred Risk policy rates, lower rates based on their low to moderate flood risk location.  
• “Subsidized “premium rates for high risk buildings built before the community enacted those flood mitigation building codes and established flood maps. (pre-FIRM).
• “Subsidized” premiums for buildings built to comply with flood maps that were subsequently revised including “grandfathered” flood zones or base flood elevations.

Fast forward to 2012, with more than 21,000 participating communities, lending laws requiring flood insurance for high risk properties and the NFIP gladly re-authorized to continue until Sept. of 2014.  In addition, we see flood maps revised to reflect changing land use and updated mapping technology, flood premiums kept artificially below market value through an annual premium cap, a $20 billion dollar debt related to claims paid for Hurricane Katrina and Superstorm Sandy and a “subsidized” rate structure that prevents the NFIP from generating adequate premium to cover future claims.  Then, on July 6, 2012 Congress passed the Biggert Waters Flood Reform Act.

As of October 1, 2013, the NFIP had begun to implement the new law with a reduction of premium subsidies including the following changes related to  high risk (A or V zone properties) built before their communities joined the NFIP or 12/31/1974 (pre-FIRM):

• Secondary homes, non-residential buildings, severe repetitive loss buildings and severely flood damaged buildings will see premium subsidies gradually phased out:  For high risk, pre-FIRM flood policies issued prior to July 6, 2012 (with no lapse in coverage) a 25% increase each year until they reach risk-based levels, which won’t be known until the owner supplies an elevation certificate.
• All new policies written between July 6 2012 and Oct. 1, 2013 will be re-written with risk based rates:  Policies (pre-FIRM, high risk) will be non-renewed and require an EC and new application at their first renewal after Oct. 1, 2013.
• Policies on primary homes with subsidized rates will see subsidies phased out gradually On existing policies for primary, pre-FIRM, high risk homes--subsidies will remain, but renewal premium rates will gradually increase each year (approx. 16-17% this year) until the owner purchases an elevation certificate and determines what the risk-based rates actually are.
• All new flood policies will only be written with risk-based rates:  New policies, pre-FIRM, high risk, (including reinstated, lapsed policies) must be issued using risk-based premium rates based on elevation figures.  
• Future NFIP annual rate increases can be raised up to a 20% average annual cap:   The premium cap on average annual premium increases for NFIP policies was raised to 20% from 10%.
• Establish a Reserve Fund to pay claims:  A 5% surcharge of the premium amounts will be assessed on all NFIP policies (except Preferred Risk) to build a Reserve fund for payment of future claims.

In the future, additional subsidies will be phased out including those policies grandfathered after map change, or those granted extended preferred risk rates due to map change.  Also the BW12 Flood Reforms included plans to establish installment payments, raise lender fines for not covering high risk properties and about a dozen flood risk studies.  However, no implementation plan has yet been established for those sections.

Consumer information is available at the following links:  FEMA Guide to the Elevation Certificate,  the FEMA Consumer Fact Sheet of BW12 and the Wright Flood Video the Basics of Flood Reform )

It is still possible that Congress may amend parts of the BW12 Flood Reform Act and we are hopeful that provisions that would make these changes more affordable could be enacted.  But, pending an Act of Congress, the meaningful reform of the NFIP is underway.