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'Don't you dare' let your flood insurance lapse, expert says: New FEMA rules could make that an expensive mistake

"Some people are going to be paying a lot more for [flood] insurance."

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Flood insurance is getting more expensive: As of October 1, the Federal Emergency Management Agency is no longer subsidizing new flood insurance policies, and the agency is changing how it calculates the rates people pay for their insurance.

The revamped formula, called Risk Rating 2.0, will no longer solely rely on floodplain maps to calculate rates; policies will assess risk by considering factors too, including a property's foundation, its elevation, its distance from a water source, the history of flooding, and, perhaps most crucially, the cost to rebuild.

Policyholders will now also have to cover the premiums entirely on their own. FEMA will no longer chip in a share.

Most people, however, don't have to worry, at least not right away, says Roy Wright, president and CEO of the Insurance Institute for Business & Home Safety, and a former chief executive of the National Flood Insurance Program at FEMA.

The new formula doesn't go into effect for existing policyholders until April 1, 2022, and even then, most of them won't notice a difference, Wright says. However, for the small chunk of property owners with expensive homes in risky areas, the key to keeping their initial costs down after April will be making sure they keep their policies current.

"Don't you dare let your policy lapse," Wright says. "You lapse your policy, you will come back as a new customer."

That's because, under federal law, flood insurance rates can't increase more than 18% in a given year. People buying new policies for risky properties will pay the higher market rates immediately. Current policy holders, however, will likely have few years before their rates fully reach the new highs, but they will begin to see incremental increases. "You've got six months to begin planning for your personal budget" for that first rate hike, Wright says.

'Some people are going to be paying a lot more for [flood] insurance'

The main reason for this update is straightforward: The National Flood Insurance Program has been financially insolvent for more than a decade. As of August 2020, FEMA was $20.5 billion in debt, even though Congress had canceled $16 billion of the agency's in debt in October 2017, according to the Government Accountability Office.

That deficit is only expected to grow as climate change makes large-scale disasters more frequent and creates more claims, says Peter Kochenburger, a professor of law at the University of Connecticut who specializes in insurance. The model wasn't a problem when the program was conceived in 1960s, but it has become less functional in the last 20 years.

Don't you dare let your policy lapse. You lapse your policy, you will come back as a new customer.
Roy Wright
President and CEO of the Insurance Institute for Business and Home Safety

"Where the NFIP really got into trouble and it became a significant deficit was [Hurricane] Katrina," he says. That was "followed by subsequent storms and events within a couple of years, and then it just skyrocketed."

The flood insurance rate formula hadn't been updated in more than 40 years. Now, using data analytics, modern flood maps, and actuarial models that better reflect climate change, the agency is trying to make the flood insurance less of a losing proposition, and putting more onus on the homes that would file the biggest claims.

"You can do much more individualized or granular risk assessments, and that has a number of real advantages," Kochenburger says. "It also means that some people are going to be paying a lot more for insurance than they would have in the past."

Floods are expensive, and most homeowners' policies exclude them from coverage

One reason flood insurance is becoming increasingly more important is that more people need it. Unlike other types of natural disasters, property owners can't do much to protect themselves against flooding, says Wright. With floods, "there's not an incremental thing you can do to substantively change the risk profile of a structure." Homeowners are at nature's mercy.

"I do a lot of work on other hazards like wildfire and wind. I can tell you specific things to do to your home that affect your risk pricing on those hazards," Wright says. "There're only three things to do on flood: Go higher and stronger, get out of the way, or put in some kind of infrastructure that diverts the water."

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Hurricane Ida's destruction from September is a notable example of this. The storm wrought destruction from Louisiana through New England, killing at least 49 people and prompting President Joe Biden to request $24 billion in emergency disaster aid from Congress (although AccuWeather estimates that total will reach $95 billion). Much of that destruction happened in New Jersey, Pennsylvania, and New York: Three states that were not expected to receive so much rain and wind as the hurricane dissipated over land.

Many of those homeowners probably didn't have flood insurance, and they'll be surprised to know that their standard home insurance policy won't cover flood damage, Kochenburger says. "It's sort of frustrating, particularly for the regulators and FEMA and everyone that the homeowners policy doesn't include flood," Kochenburger says. Flooding is "almost always specifically excluded."

Flood-related costs can add up quickly. Just two inches of water could cause more than $10,000 in damage to a 1,000-square-foot, one-story home, according to FEMA's flood damage calculator. As of August 31, the average flood claim FEMA paid for the 2020-'21 fiscal year was more than $41,000, according to agency data.

Most customers will see 'the same kind of pricing they saw in the past'

Whether you've had flood insurance for years or the recent spate of storms has got you seeking your first policy, most customers won't notice big jumps in premiums, Wright says. The brunt of the new risk formula really will be felt by people with the most expensive and most at-risk properties.

"That's not getting enough attention," Wright says. About "60%-65% of the customers are going to see the same kind of pricing they saw in the past," Wright says. "Yes, there's a new system, but it really is not impacting them, which is to say, on an average year, they're going to see a 5%-9% increase in their premium."

For 66% of current policyholders, the rate hikes for the first year will be less than $10 per month, according to an analysis by the Association of State Floodplain Managers and The Pew Charitable Trusts. Almost 6.6% will see increases between $10 to $20 a month, and only 3.8% will see increases of more than $20.

Those rate increases are mostly to cover increased costs in construction, Wright says. About a quarter will even see their premiums drop, according to FEMA estimates, because the new models add data that downgrades their risk profiles.

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Another thing that isn't changing: FEMA will still use flood maps to determine the riskiest zones for construction, and people in those zones will be required to carry flood insurance.

But Wright isn't convinced that more expensive rates will make people ditch their beachfront properties.

"When the National Flood Insurance Program was created in the late '60s, there were these interesting papers written at the time, and they presumed that people would move out of harm's way when they were told that there was a risk," Wright says. "Well guess what? For 50 years, that hypothesis, that assertion, has been proven false."

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