Property owners should watch for rising flood insurance costs

03/28/2014 6:19 PM

03/28/2014 6:20 PM

It may be strange to talk about flood insurance in the middle of a drought, but call me the canary in the coal mine.

The National Flood Insurance Program, which has provided relatively cheap flood insurance for homes since 1968, is in financial trouble, and policies will likely not be so inexpensive in the future.

This month, President Barack Obama signed a law to cap premiums. But the reprieve is temporary.

As of last year, just 2,387 of the 6,000 Fort Worth properties in a flood plain were covered by flood insurance. Of those, 2,040 were single-family homes; the owners are paying $1.2 million in annual premiums ($571 a year on average) for $433 million in coverage, said Clair Davis, the city’s flood plain administrator. Not all the structures with policies were in a flood plain.

“Flood insurance is mandatory only for structures both in the flood plain and having federally insured mortgages or loans,” Davis said. “Most banks and lending institutions are federally insured.”

And, Davis noted: “If the conditions are right, flooding can happen almost anywhere in Fort Worth. In fact, Fort Worth is similar to the rest of the country in that most of our repetitive flood insurance claims are from areas outside the FEMA-mapped flood plain.”

First, a little background. Flood insurance is required by most mortgage companies for homes built in high-risk areas, or Zone A. The National Flood Insurance Program, which backs flood insurance sold by traditional mortgage companies and offers subsidies in the form of lower rates, is now $24 billion in debt. To address that, Congress passed the Flood Insurance Reform Act in 2012, calling for large rate increases to make the program “actuarially sound,” as well as redrawn flood plain maps that better reflect risks.

Under the law, annual rates were to increase a whopping 18 percent for regular homeowners and 25 percent for businesses and second homes after the agency updated the maps. After an outcry from constituents, Congress reversed course and voted for the reprieve signed last week.

But the Federal Emergency Management Agency, which oversees the flood insurance program, has stated that at the end of the federal fiscal year, Sept. 30, and once funding is available, it will phase in the full-risk rates for properties in a revised or updated flood insurance rate map dated after July 2012. The agency expects the process to take a year to 18 months, which pushes any rate increases into 2016 at the earliest.

But most insurance agents and real estate experts say the day of reckoning is coming.

“The flood insurance program has had subsidized rates since the 1960s, and it’s not too hard to see how those subsidies could get out of whack with the risks involved with the flood plain,” said Charles Gilliland, a research economist at Texas A&M University’s Real Estate Center. “But somebody’s going to have to pay the bill at some point to cover the cost of the real risk of flooding.”

The reform act also called for changes to the flood zone maps, which Gilliland said are way out of date. A recent report from the Government Accountability Office criticized FEMA for not having good data on flood zones.

“The GAO report said FEMA’s records were so awful, we can’t get any kind of meaningful reading on it,” Gilliland said. “Even the federal government can’t figure out how bad it is or how it would work out, which is not very comforting.”

Bill Brown, Arlington’s storm-water executive manager, said the maps aren’t perfect but have improved with technology.

In Arlington, 1,697 properties, residential and commercial, have flood insurance coverage of $403 million, Brown said. Total annual premiums are close to $1 million. The city’s policyholders get a 15 percent discount on flood insurance for homes in Zone A because the city earned a Community Rating System of Level 7.

The CRS program, run by FEMA, requires action from cities in four areas — public information, mapping and regulation, flood damage reduction and flood preparedness — to receive discounts on premiums. Policyholders in cities that apply for the CRS receive discounts of 5 to 45 percent, depending on the number of actions completed by the city.

Fort Worth policyholders receive a 10 percent discount because of the city’s Level 8 rating.

“Our goal is to be a Level 6 community by 2016,” Davis said. “Increases beyond 6 are possible, and we are working on a strategy to improve our level as we develop our program.”

In the meantime, homeowners may want to check their flood risk at FloodSmart.gov and consider buying insurance while costs remain manageable. Insurance agents said policies can be transferred to new homeowners once in place and may be cheaper than a new policy.

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