If you have a home that is in a flood plan or flood hazard area, you may be in for some sticker shock when your flood insurance comes due or worse yet, let it lapse.
Thanks to the Biggert-Waters Flood Insurance Reform Act, which was passed in 2012, it now requires the National Flood Insurance Program (NFIP) to price flood insurance policies based on actual risk. The new flood insurance pricing went into effect on October 1, 2013.
According to an article from TriComply, a compliance solution designed by TriNovus for the banking industry, when the NFIP was first instituted, the government wanted to maximize the number of covered properties that had flood insurance. Subsequently, they mandated flood insurance for properties on which a covered lender made a loan. The government subsidized the premium to induce the purchase of flood insurance and so today, most flood insurance premiums are below the actuarial risk.
Unfortunately, flood claims from Hurricane Katrina put the NFIP about $18 billion in the hole. After Super Storm Sandy battered the East Coast recently, it is now $24 billion in the red, necessitating hefty premium increases.
The government estimates that some 80 percent of current flood policies are priced at market rates. These policy holders will receive a five percent increase to help the fund to catch up. The remaining 20 percent, stated the article, will incur significant rate increases. The premium for properties in high risk areas can increase as much as 10 percent of the properties replacement cost value. It gave an example of a Pennsylvania residence where the annual flood insurance premium on a home valued at $150,000 went from $2,300 to $16,543. In another case, a condominium in south Florida saw it’s premium rise from $5,126 to $36,584 per year.
For most properties in high risk flood areas, the article stated that the premium will raise incrementally over a period of five or six years until it reaches its actual market value. However, if the property owner sells the property, or if the existing policy is allowed to lapse and must be replaced, the premium cost goes to the new rates. Affected properties will suffer a severe decrease in value which may make some properties unsalable.
If you have flood insurance on any properties, check the policy and talk with your insurer and financial lender.