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Federal Flood Insurance Spikes, Affecting California Coastal Homeowners

On October 1, 2021, a historic recalculation of flood insurance premiums by the Federal Emergency Management Agency (FEMA) went into effect, according to a two-phase process.

  • PHASE I: Starting October 1, 2021, new policies are subject to a revised rating methodology, and existing policyholders who are eligible for renewal can take advantage of immediate decreases in their premiums.
  • PHASE II: All remaining policies renewing on or after April 1, 2022, will be subject to the revised rating methodology.  

FEMA manages the National Flood Insurance Program (NFIP), enabling homeowners and renters in participating communities to purchase federally backed flood insurance.

“Beginning October 1, [NFIP] will begin to offer more equitable and risk-informed rates,” said FEMA.

Flood insurance is required for all property owners who live in high-risk areas and have a mortgage from a federally regulated or insured lender.

Why flood insurance?

Flooding can be financially devastating to households and businesses. As extreme rainfall and flash floods intensify and become more frequent, people must manage the risk that flooding poses to their property and take proactive measures to support a quick recovery in the event of a disaster.

That’s where flood insurance comes in. Flood insurance can help individuals, businesses, and communities prepare for and recover from disasters by protecting properties and belongings when flooding strikes.

Because homeowners insurance typically doesn’t cover flooding, most residential flood insurance policies are sold through NFIP. The program has two main goals: (1) to provide access to primary flood insurance, thereby transferring some of the financial risk to the federal government; and (2) to mitigate the nation’s flood risk through the development and implementation of floodplain management standards.

A New Methodology for Calculating

For the first time since NFIP was created in 1968, FEMA has introduced a new methodology for calculating flood insurance rates, known as Risk Rating 2.0. “The methodology leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarially sound, equitable, easier to understand, and better reflect a property’s flood risk.”

Historically, insurance premiums were “based on a property’s location in a flood zone, the occupancy type, and the structure’s elevation. Its review [was] based on the risks of flooding associated with rising rivers and coastal storm surge. In addition, the program’s current base rate for home insurance premiums [was] based on replacement cost rather than real property value. This [meant] that the owner of a $5 million mansion with the same flood risk as the owner of a $500,000 home [paid] the same rate as the latter.”

The new policies, however, consider a broader scope of metrics, including replacement value, proximity to a potential flood source, and risk projected by updated disaster models. Reports reveal that 77% of nationwide policyholders will see an increase in their rates; however, the majority will increase by less than $10.

Benefits of Raising Flood Insurance Premiums

FEMA explained the reasoning behind its new methodology:

“With Risk Rating 2.0, FEMA now has the capability and tools to address rating disparities by incorporating more flood risk variables. These include flood frequency, multiple flood types – river overflow, storm surge, coastal erosion, and heavy rainfall – and distance to a water source along with property characteristics such as elevation and the cost to rebuild.”

Risk Rating 2.0 is intended to correct the inequity built into NFIP’s current underwriting and rating system. “Currently, policyholders with lower-valued homes are paying more than their share of the risk, while policyholders with higher-valued homes are paying less than their share of the risk. Because Risk Rating 2.0 considers rebuilding costs, FEMA can equitably distribute premiums across all policyholders based on home value and a property’s unique flood risk.”

Furthermore, past policies placed responsibility on taxpayers to cover the costs for debt associated with flooding, and the new policies are designed to place responsibility on the homeowner.

“It’s hard to rationalize taxpayer support for people who live in flood zones,” said Peter Van Doren, senior fellow at the Cato Institute.

“The NFIP’s new rating methodology is long overdue since it hasn’t been updated in more than 50 years. Now is the right time to modernize how risk is identified, priced, and communicated. By doing so, we empower policyholders to make informed decisions to protect their homes and businesses from life-changing flooding events that will strike in the months and years ahead due to climate change,” said David Maurstad, a senior executive with NFIP.

Impacts on California Homeowners

However, FEMA is not factoring climate risk into the cost of government-backed plans, which could result in some California homeowners’ insurance increasing nearly 20% year-over-year. Many coastal homeowners will be impacted as global climate change makes a majority of the coast a high-risk area.

“California’s climate is already the most variable in North America, and global climate change is making it even more volatile, with increasingly dramatic swings between wet and dry conditions – referred to as ‘precipitation whiplash.’ In addition, rising sea level is increasing the likelihood of coastal flooding, which is often associated with intense storms,” reported the Public Policy Institute of California

“The takeaway from [a study by the First Street Foundation] is that the state – and its federal partners – may have vastly underestimated current flood vulnerability. FEMA maps show that roughly 500,000 California properties are at substantial likelihood of flooding, with a 1% chance of being flooded in any given year. The study found that more than twice that amount – 1.1 million properties – are already at this level of risk and that an additional 150,000 properties will join them in the next 30 years, mainly because of rising seas. The number will likely be higher once the flood risks from warming atmospheric rivers – outlined in the first study – are factored in.”

The Importance of Mitigation Efforts

The bottom line is that floods can be financially devastating and are capable of tearing apart properties and communities overnight. With flood insurance, people have greater access to the resources they need to recover from such disasters.

The recent changes to federal policy in Risk Rating 2.0 make insurance costs more accurately reflect risk while also creating a fairer system. Californians are now paying their true flood risk rate under the revised methodology; however, they can help reduce their costs by implementing mitigation measures.

The state plays a crucial role in leading those efforts through coordination and collaboration with communities. States, local communities, tribes, territories, and individuals should prioritize mitigation projects, mitigation planning, and the adoption or strengthening of building codes and zoning regulations to improve resilience and reduce flood insurance rates.

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