Flood Insurance can be confusing and many property owners would prefer to “set it and forget it” but reviewing your policy might provide savings and peace of mind. FEMA recently published changes to the National Flood Insurance Program (NFIP) that will go into effect on April 1st, 2021. Ahead of those changes we’ve put together a brief primer on flood insurance to help you evaluate your coverage and premiums.
Flooding is the most common natural disaster that affects homeowners every year and flood coverage is not included in your standard homeowners’ policy—or under other disaster policies like hurricane insurance. If you’re in the market for flood insurance, there are a couple routes you can go down: you can take advantage of FEMA’s National Flood Insurance Program (NFIP), you can insure through a private insurance company, or you can purchase a combination of both.
There are several differences between NFIP and private insurance policies. One of the main divergences is that private insurance companies have the option of terminating your policy after a claim, but the NFIP will not. While this acts as a fail-safe program for communities in flood zones, it also contributes to increasingly higher premiums. There is also a 30-day waiting period for NFIP insurance to become effective—you can’t purchase and have immediate coverage when the weather changes. Depending on your home price, NFIP coverage limits might govern your purchasing decisions. NFIP coverage maxes out at $250,000 for property and $100,000 for contents, so if that is not enough you might consider combining an NFIP policy with additional private coverage to make up the difference. Private insurance may also allow for coverage that the NFIP does not, like policy riders that cover landscaping and basement finishes.
There are many factors that determine the price of flood insurance policies and there are many finer points as to what that insurance will cover. How you pay your premium may influence your decision as well, NFIP premiums must be paid annually whereas private insurance will often offer installment plans. Your premium is currently based on where your property is located in the Special Flood Hazard Area (SFHA), the type of construction and when the structure was built, whether the utilities are elevated, how far above base-flood elevation levels the structure is, and more.
Most people who purchase flood insurance do so to meet lender requirements but you can also elect to voluntarily purchase flood insurance if you live in a low- to moderate-risk area. If so, you might qualify for an NFIP Preferred Risk Policy (PRP), which offers the same protection as a standard policy at a deeply discounted rate. While it may be tempting to forego coverage based on being in a low-risk location, it is important to note that more than 20% of flood claims come from these areas and the average claim for 2020 was over $40,0001.
In general, when determining how much coverage you need, we highly recommend you speak with a local agent who is knowledgeable about your area for specific details on coverage and rates.
Rate changes will begin on April 1st, 2021 and will vary based on zoning and type of structure. Primary residences in all pre-FIRM zones will see an average increase of 7.7% and businesses and secondary homes will see more substantial increases in the 25% range. Severe Repetitive Loss (SRL) and Substantially Improved (SI) properties will also increase approximately 25%. Other subsidized policies and zones will see more moderate increases, generally under 2%. PRP eligible properties and properties newly mapped into the SFHA will see a 15% increase go into effect on January 1, 2022. The majority of losses come from Repetitive Loss (RL) properties and they will see the most substantial premium increases.
As with all insurance, the NFIP relies on more premiums being paid in versus claims being paid out. FEMA has historically struggled with collecting enough in premiums to offset the cost of claims being paid. Bridging this gap, the NFIP makes premium adjustments to stay ahead of the curve and to continue to be able to offer coverage to all property owners. Since the NFIP insures all levels of flood-risk properties, premium increases are inevitable.
Reforming the NFIP has been on the House Financial Services Committee’s agenda for a long time. Raising rates on homeowners to cover their losses is not FEMA’s ideal plan; it is a stopgap on the way to better fiscal policies. By selling catastrophe bonds on the private market, FEMA could reduce the homeowner’s obligation to make up the loss difference. Congress has been looking to replace interim spending measures that are not cost efficient with longer term authorizations that will have greater cost-saving benefits.
The NFIP has remained relatively unchanged since the 1970s and Risk Rating 2.0 is FEMA’s plan to optimize the program and provide more accurate risk assessments. Through advances in technology and distribution channels, Risk Rating 2.0 promises to make the process more transparent and accessible to flood-plain managers, communities, and homeowners while creating a risk-informed rating plan. The new model is set to roll out in October of 2021, though it faces several logistical and political obstacles. You can read about what we know thus far in our Risk Rating 2.0 blog post.
There are steps you can take to mitigate your premium costs. You can make structural improvements to existing properties such as elevating outside utilities or backfilling your basement and you may be eligible for loans or grants through FEMA to make those improvements. Consider building new construction homes without a basement and placing your HVAC in the attic. You can also weigh the benefits of a higher deductible or shop rates through private insurance companies.
You may also submit additional information to FEMA for Special Rates consideration to receive a premium reduction. The requirements for eligibility are specific, the paperwork must be complete and accurate, and you have to go through a separate process, but you could come out with a better rate just by doing a little homework.
A relatively easy way is to make sure your Elevation Certificate is complete and accurate. The 2021 Addendum to the 2017 Community Rating Service (CRS) Manual will affect community class ratings, which will in turn affect discounts on premiums. These updates will likely open up additional opportunities for savings to communities but some may lose their discounts if they do not stay up to date on the changes. If you're interested in these shifts, we've summarized some of them here. While you do not have to buy flood insurance through the NFIP, if your community takes advantage of the CRS credit opportunities you may be able to receive substantial discounts (up to 45%) on NFIP premiums.
If you'd like to continue the conversation about insurance or mitigation, we're always happy to chat! Feel free to reach out to us at email@example.com anytime.