Major changes in the National Flood Insurance Program take effect on Friday. A new method of gauging risk is supposed to make rates more equitable, reduce big subsidies and incorporate new risks from climate change. Rates could rise sharply for Carolinas' coastal property owners, while policyholders elsewhere will actually see bills go down.
The changes come as agencies across the federal government look for ways to adapt to climate change. Flooding from big storms and hurricanes has become more intense, and sea level rise is already affecting some coastal communities. The new methodology, called "Risk Rating 2.0: Equity in Action," takes climate change into account.
"As the effects of climate change continue to worsen the impact of flooding, then more people are going to need this flood coverage. And there is no better risk communication tool than a pricing signal," said Roy Wright of Charlotte. Wright started the push for Risk Rating 2.0 when he ran the National Flood Insurance Program from 2015 to 2018. He's now CEO of the South Carolina-based Insurance Institute for Business & Home Safety.
Risk Rating 2.0 also corrects longtime inequities, to make sure property owners pay for actual risk, said David Maurstad, who now oversees the program at the Federal Emergency Management Agency.
"We can no longer continue to ignore the fact that some of our policyholders have been unjustly subsidizing other policyholders," Maurstad said. "Policyholders with lower-value homes that have been paying more than they should will no longer bear the cost for the policyholders with higher-value homes who have been paying less than they should."
The changes are the most significant since Congress created the flood insurance program in 1968 to protect property owners and help speed up recovery after natural disasters.
"In 1968, this program was put in place because there was no private market, there was no flood insurance available," said Roy Wright, the former National Flood Insurance Program leader.
Most mortgage lenders require flood insurance if your property is in a flood zone. Federal insurance is typically the only option, though a private market is emerging in some states.
In the past, rates were set by zones and based on ground elevation and a 1% chance of annual flooding. Premiums were the same whether you had a coastal mansion or a smaller house away from the water. Now, FEMA is using more complex data to set rates property by property. That includes the distance to a body of water, potential and frequency of different kinds of floods, first-floor height and building type, Maurstad said.
"So we're moving away from the 1970s, rather static measurement just looking at the property's elevation within a zone on a flood insurance rate map," Maurstad said.
Those factors are still important, he said, but so now are things like the cost to rebuild, "which has not been a part of the way that we've looked at risk before."
FEMA says the biggest rate increases are at beachfront homes. Steve Bonday of Bankers Insurance sells flood insurance in Kitty Hawk, on North Carolina's Outer Banks. He says several of his clients moved up closings to grandfather in old rates for this year, like one couple in Rodanthe, on Hatteras Island.
"Their flood premium, if they closed prior to October the first, was $708. The same exact flood coverage, after Oct. 1, was $1,563," Bonday said.
That's more than double. Bonday says the couple closed this week instead of O c t. 8 as planned. Those lower rates won't last forever. When they renew next year their rates will begin rising. By law, increases are capped at 18% a year, for as long as it takes to reach the new premium.
Maurstad says new rates for the most expensive homes in flood zones could be big, but rare.
"We certainly are hearing of examples that premiums are at $5,000 or $10,000. And, you know, it seems that folks are thinking these examples are typical. And they're not. These are some of the highest premiums that are being quoted," he said.
Only about 0.2% of homes in the National Flood Insurance Program will have annual premiums of $10,000 or more, Maurstad said. With annual increases capped at 18%, some could take 10 years or more to get to the full rate.
About two-thirds of policyholders nationwide will see increases in line with typical annual increases, averaging up to $120. About 11% will see increases of $240 or more. But Maurstad said this change is historic because it actually reduces rates for some policyholders — something he says a private insurer would never do.
"Under the legacy rating system, policyholders did not receive premium decreases. This is a first for the ( National Flood Insurance Program ) and a monumental step in communicating flood risk that is commensurate with the property's unique flood risk," he said.
T wenty-th re e perce nt of properties nationwide will see rates go down an average $1,032 a year. In the Car olinas it's slightly higher — about 26%.
If you file a claim, national flood insurance payouts are capped at $250,000 by law. That won't change. FEMA says rate decreases are expected at most homes below that value.
The new rates are being phased in. They take effect this month for all new policyholders. They also start right away for policyholders whose rates are decreasing. But existing policyholders facing rate increases won't see a change until renewals after April 1.
That staggered start came after criticism by U.S . Sen . Chuck Schumer and others this spring. FEMA agreed to the delay to give property owners more time to prepare. Two weeks ago, the senators called for another delay. But Maurstad said last week there's no going back.
"We believe that this is a long, long overdue improvement to the way that we identify risk, and we price our policies according to that risk. And that's what insurance is intended to do," Maurstad said.
The new risk methodology has the backing of the National Association of Realtors and many industry and watchdog groups. The Wall Street Journal said in an editorial it's "a step toward fairness" and that while more reforms are needed, the new pricing is good for taxpayers.
Andy Hansen agrees. He has flood insurance for his house not far from the beach on Bald Head Island. He doesn't know yet how his premium will change. But he says basing rates on actual risk is fairer.
"A place that's on the beach might cost $6,000 a year for a policy and a place just off the beach might cost 5,500. And the risks, in my opinion, are completely different. And so if what's coming is a more equitable premium based on risk, then I actually think it's a good thing," Hansen said.
The next question is whether higher prices for greater risks will do anything to cool development of all those homes with an ocean view.
One final point: Flood insurance is not available everywhere — only in communities that participate by agreeing to take steps to reduce flood risk. Mecklenburg County recently earned a top rating from FEMA for its efforts, qualifying policyholders for a 35% discount.
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