INSURANCE CONUNDRUM

THE ISSUE: National Flood Insurance Program rates.

OUR OPINION: Realistic flood insurance policy needed.

Get more from the Citrus County Chronicle

Many Florida businesses and homeowners are still catching their breath from recent double-digit increases in property insurance premiums spurred by ballooning reinsurance costs, loss creep from hurricanes and coastal flooding from rising seas.

Adding to their financial burden is the Federal Emergency Management Agency (FEMA) Risk Rating 2.0 program that went into effect Oct. 1. A real game changer, it could leave more than 1.7 million Floridians with National Flood Insurance Program (NFIP) policies wheezing from rate increases.

Implementation of the Risk Rating 2.0 system is the first change to the way the NFIP calculates premiums since the 1970s and is the most dramatic change since the program was created by Congress in 1968 to provide federally subsidized policies to property owners in flood-prone areas.

Heretofore, FEMA’s risk-rating system placed properties either in or out of the “100-year” event floodplain. The rating system’s subsidized low premiums, which were not proportionate to risk, have served to incentivize property owners to roll the dice and build in flood-prone areas, rather than promote risk aversion.

Given the NFIP’s ballooning $20.5 billion U.S. Treasury debt that’s accruing more than $1 million in interest daily and the risk of catastrophic flooding events that’s becoming more common due to climate change and rising sea level, a more realistic rating system linking premiums to risk is essential to the program’s solvency. 

Accordingly, the new risk-rating system uses home value, distance from the water, and first floor elevation to determine a property’s flood risk for calculating the flood insurance premium.

Although FEMA estimates 20% of Florida NFIP policyholders will see decreases in their premiums under the new risk-rating system, the overwhelming majority will see average first-year increases ranging from less than $10 per month to over $20 per month. And as things go, costs can be expected to grow annually up to the cap of 18% per year for primary residences in subsequent years.

The NIFP’s solvency and added financial burden on impacted Floridians that could ultimately price some out of their homes or businesses has created an insurance conundrum of how to best meet the needs of insurer and policyholder.

With bipartisan opposition against the new rating system building in Congress, premiums must not only be based on proportional risk, but also affordability. As such, the fairest option for all parties would be the creation of a means-tested affordability program.

Otherwise, growing public pressure could prompt Congress to torpedo the Risk Rating 2.0 system, as it did the 2012 Biggert-Waters Flood Insurance Reform Act in response to skyrocketing premiums, to the detriment of the NFIP and those it protects.