PropertyCasualty360.com Editor’s Note: The slideshow above reveals states where at least 80% of policyholders are expected to see their premiums increase starting April 1, 2022, according to the Redfin report cited in the following Bloomberg article.
(Bloomberg) – When the Federal Emergency Management Agency (FEMA) launched a major overhaul of its national flood insurance program last April, it promised that bigger, wealthier homes would bear the brunt of the premium increases, while almost 90% of policyholders would see their costs remain stable or decrease.
But as the program kicks in this month for existing policyholders, more than 80% of those homeowners are expected to see rates go up and those gains will be split broadly evenly between rich and poor areas, according to a report from the real estate company Redfin. The report also found that “Hispanic-majority” neighborhoods are more likely to see their flood insurance premiums increase than any other major neighborhood ethnic or racial group, with 84% of policyholders facing increases.
The NFIP serves approximately 3.4 million single-family homes, most of which are in high-risk flood zones. The program was created in 1968 to cover homes that private insurers were unwilling to cover or would only cover at relatively high cost. The government offered smaller bonuses, but the result was that over time the program went bankrupt. It has more than $20 billion in debt, partly due to climate change-related phenomena such as rising sea levels and more storms. These resulted in more widespread flooding, causing more damage than the bounties could cover.
Risk Rating 2.0 Aims for “Fairer Rate Setting”
For years, FEMA tried to reform the program to make premiums more reflect true costs, but it was unpopular with Congress and voters. Last year, FEMA rolled out a reform known as Risk Rating 2.0, based on cutting-edge science and modeling techniques.
The new program aims to be fairer by setting rates based on the risk of individual homes, as opposed to the risk of all homes in a risk area as the old method did. The idea is that the new system would charge higher premiums for the riskiest homes, while many other homes in the program would actually see lower premiums. FEMA also said rates would not exceed 18% per annum and would be capped at $12,000 in total. He also said the most expensive homes would bear the brunt of premium increases.
FEMA would not specifically comment on Redfin’s findings. “FEMA has not provided any information about Risk Rating 2.0 premiums to outside entities, and any attempt to compare an outside entity’s premium estimates to Risk Rating 2.0 is simply a speculation,” the agency wrote in an email.
Sheharyar Bokhari, a senior economist at Redfin who did the research for the report, acknowledged that FEMA hasn’t released any individual house data, but said the agency publishes zip code-level data on the share. policyholders who will see rate increases. Redfin analyzed this data along with census data on income and ethnicity in postal codes to draw its conclusions.
In Texas and Florida, about 90% of homeowners will face increases, according to the analysis. Premiums were well below the national average in these states, despite experiencing a disproportionate amount of devastating hurricane flooding. The increases will disproportionately affect zip codes with large Hispanic populations.
“That’s likely because Texas and Florida — the states hardest hit by FEMA’s overhaul — have the largest Hispanic populations behind California,” the report notes.
Redfin found that 76% of policyholders in the highest income neighborhoods see their premiums increase. That’s just below the national average, which is the 81% of policyholders overall who are about to see rate hikes.
One reason for the difference between Redfin’s discovery and FEMA’s promises may be semantics. FEMA has included people whose increased premium payments will be $10 or less per month as part of its “stable group.”
But Bokhari said the implications down the road, even for this group, could be substantial rather than “steady” because if FEMA can do rate hikes of just 18% a year, it can do so for up to 15 years. or until a policy has reached $12,000. It’s something that could really pinch less wealthy people over time, even if they’re not paying the absolute highest amount in premiums, he said.
“Most policyholders probably won’t feel the burn of FEMA’s price hikes in the first year, but by the fifth or tenth year, the high cost of flood insurance could have an impact where the Americans decide to buy and build homes,” Bokhari said.
Another possibility is that FEMA’s rate hikes backfire and cause people to roll back policies leaving them vulnerable to financial ruin from flooding – essentially the opposite of what FEMA intended. Only people in designated areas with federally backed mortgages are required to have flood insurance. So, despite the increased risk of flooding, FEMA is insuring fewer people than in recent years because premiums, while relatively modest, continue to rise each year for all homeowners, regardless of risk, and some people dropped their coverage. The agency had about 3.4 million policyholders of single-family homes in 2020, up from 3.8 million ten years earlier.
Since the pandemic, Florida and Texas have seen their populations increase. Many of these people are trying to escape higher tax states and may not be considering rising flood insurance costs.
“Some people may choose not to renew their flood insurance policies despite increased flood risk due to climate change, especially as inflation pushes up prices elsewhere in the economy as well” , Bokhari said.