Changing the Plan: The National Flood Insurance Program, which is currently $25 billion in debt, received an overhaul last year in an effort to bring the flailing insurance scheme in line with actual risk-based premiums. The Biggert-Waters Flood Insurance Reform Act of 2012 was the result of a lengthy effort to reform the NFIP, which is both financially unsustainable and encourages risky development in floodplains, according to many experts.
The act, which was signed into law in July 2012, extended the NFIP for five more years while mandating changes, such as eliminating rate subsidies for second homes and repetitively flooded residences. The changes have been rolled out gradually, but those that affect policyholders the most began earlier this year, with rate increases for second homeowners implemented on January 1 and subsidies for business and severe repetitive loss properties ended on October 1.
The termination of subsidies will result in ratepayers seeing their premiums increase by 25 percent per year until rates reflect the full risk, according to the Federal Emergency Management Agency, which administrates the program.
Planned Out: Although the plan to end of subsidies has been in place for more than a year, many home and business owners have been caught off guard by the increases, according to the New York Times. Lawmakers, including bill sponsor Rep. Maxine Waters, are also up in arms.
“[I am] outraged by the increased costs of flood insurance premiums that have resulted from the Biggert-Waters Act,” Waters said in a statement in Time. “I certainly did not intend for these types of outrageous premiums to occur for any homeowner.”
It’s difficult to understand how Waters thought the NFIP, which subsidizes below-market insurance rates for about 1 million property owners, would become solvent without a significant increase in the long discounted policies. But that’s not even the point.
“So property owners who will see their flood insurance rates are paying the price for the unintended consequences of the Biggert-Waters Act,” wrote Bryan Walsh in Time. “But take a dive into the very perverse world of subsidized flood insurance, and you’ll see that we as a country have been paying for unintended consequences since the NFIP was born in 1968.”
Planning for Change: While it might make sense to provide assistance to homeowners who will be directly affected by the increases, neither lawmaker ire nor cries of unfairness will do much good now that the law is in effect. FEMA administrator Craig Fugate told Senate committee last month that his hands were tied when it came to reeling in soaring costs, according to the Times.
“I fully believe we should stop subsidizing risk as we go forward for new construction, for secondary homes and for businesses,” he said. “But I think we need to look at affordability for people who live there, look at how we can mitigate their risk.”
In the meantime, states are taking matters into their own hands. Mississippi has filed a suit in federal court to stop the increases and Louisiana is also looking at ways to avert them. If their and others’ efforts are successful, though, it’s unclear what that might mean for the NFIP as a whole. Perhaps homeowners find that instead of paying increased premiums, they don’t have to pay for flood insurance at all.
“The flood insurance program is one big storm away from not existing at all,” Steve Ellis, the vice president of Taxpayers for Common Sense, told the New York Times. “There’s a lot of talk about fairness, but I would argue that it’s not necessarily fair that some people are paying full risk-based rates and other people aren’t.”