Business Notes

Flood Insurance Rates Could Surge, But How High?

By MARIA SCANDALE | Sep 13, 2017
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The National Flood Insurance Program won’t weather the storms without more rate increases. That’s a coming reality across the country, and a question on the minds of Long Beach Island-area residents as hurricanes Harvey and Irma are currently estimated to cost the U.S. economy $300 billion.

For one regional look, The SandPaper talked to Andy Anderson of Anderson Insurance Agency of Haven Beach and Manahawkin, which marks its 50th year in business in 2017. The insurance industry has dealt with the winds of change in the last half-century.

“It’s our 50th year, and I believe that we’ve paid out more in claims in the past five years than we did in the previous 45 years combined,” Anderson said.

“If the typical non-elevated home has to have 4 feet of its interior removed – that includes all the kitchen cabinets, floors, tile in the bathrooms, all the interior doors – to replace that in 1992 dollars versus 2012 or 2017 dollars is easily double.”

How can the industry keep up as storm after storm makes its named mark? Anderson said, “People who purchase flood insurance policies have to make certain that the amount of flood insurance that they’ve purchased covers their anticipated loss in today’s dollars.”

He also referred to a Sept. 5 article in Insurance Journal, a reputable trade publication, that states, “The National Flood Insurance Program (NFIP) is currently on a path that will lead to a shortfall of $1.4 billion because its method for setting premiums has underestimated how much its claims will cost by about $1.1 billion and also because legislated surcharges are about $300 million shy of what’s needed to cover premium discounts given to certain properties, according to the Congressional Budget Office (CBO) report, National Flood Insurance Program Financial Soundness and Affordability.”

The full article is available online at and is titled, “Why Federal Flood Program Is Sinking Deeper Into Debt: A CBO Report.”

Asked what insiders are saying about rates going up in the wake of this month’s hurricanes, Anderson answered, “The rates are on an upward trend with the goal of making the flood insurance program financially self-supporting.” (As part of the Department of Homeland Security, the Federal Emergency Management Agency administers the National Flood Insurance Program.)

“Before Hurricane Harvey, the flood insurance program was in debt approximately $23 billion. Even with the rate at which they’re increasing premiums, I’m relatively certain that the NFIP will need to borrow more money from Congress in order to pay claims, and there will be even greater pressure from Congress on the NFIP to achieve what we call rate adequacy.”

The program is also considering affordability, he added.

“They recognize that people that make a certain amount of money and live in a higher-hazard flood zone don’t have the financial resources to elevate their home, nor do they have the resources to pay the actuarily correct premium. So then it becomes a social issue as to what we do with all of these people who have these properties.

“Nobody has found the answer to that yet because you would be looking at probably hundreds of billions of dollars to buy those properties to elevate them.”

One bit of new information from the interview was an advisory to homeowners who do not have flood insurance but plan on buying it: Don’t wait until several years down the road; by then the cost could have quadrupled, as opposed to phased-in billing that will affect existing policyholders.

“The cost of flood insurance is going to increase, but it’s going to increase exponentially for those who have pre-flood insurance rate map buildings who do not currently have flood insurance,” Anderson said, referring to buildings built before 1974.

“So, if they buy a policy today, they can lock in to a lower rate increase. Those who do not purchase insurance until a few years down the road will find that the flood insurance could cost four times the premium it costs today.”

Right now, there are limitations on how much the NFIP will increase the current annual premium of homeowners who already carry flood insurance. “However, on a go-forward basis, there are no guarantees that these limitations on rate increases will remain,” Anderson said.

“Typically it’s from 7 percent to 25 percent is the maximum rate increase that they can apply today,” he said.

The number depends on whether it is a secondary residence, primary residence or commercial building, “primary being the lowest, commercial being the highest.”

“There is an exception to that – commercial repetitive-loss buildings. We’ve seen those (premiums) go up 85 percent in one year. So commercial buildings are being hit harder than residences for rate increases.”

Repetitive losses in commercial buildings are occurring where it is difficult for the buildings to be elevated.

“There are many where it is impractical or impossible to elevate them,” Anderson said. “For instance, if you look at the commercial district in Beach Haven between 10th Street and Amber Street, there are a number of buildings in there that can’t be elevated ... there is no place to put a running set of steps or ramp to get that high.”

The National Flood Insurance Program has been promoting “smart build,” “essentially elevating the buildings,” Anderson said. “And when we look at the claims history, we see that the losses for elevated buildings are quite small; the losses come from the older, non-elevated buildings, and there are plenty of those out there,” both commercial and residential.

Meanwhile, a new base flood elevation will be set by FEMA, but not for two more years. That has left architects and homeowners wondering what the new requirement will be, in discussions at town meetings.

“The ‘preliminary’ maps are still out there, so it’s still a work in progress,” Anderson noted. “But with the new flood maps, they’re taking a prospective look at flooding, rather than a retrospective look at flooding ... and that results in somewhat higher minimum elevations.”

Incidentally, a pointer is to keep records for 10 years, not the standard seven, if you did some of the repairs from previous storms yourself. You might need those receipts to prove which damage was caused by the most current storm.

“The flood insurance program always looks back 10 years for properties that have had losses ... you can do the repairs yourself, but you have to have receipts for at least the materials. So a lot of people think they only need to keep financial records for seven years, but for the flood insurance program, it’s 10 years.

“There are very sad cases where a couple sold their home up north, came down here, dolled their shore house all up, didn’t have a mortgage and had a devastating loss and don’t have the funds to rebuild it,” said Anderson. “Some of those homes still sit un-repaired today. If those property owners purchase insurance today and their homes are subsequently flooded, they would have to document with paid receipts if the damage to their property was caused by this storm and not a prior storm.”

A shortage of insurance adjusters is another possible complication for the future, Anderson noted.

“One of the things we’re fearful of with the next storm for us is the availability of adjusters. There is already a huge demand in the Caribbean islands that are U.S. territories, Texas before that, and now Florida.”

A subsequent article in Insurance Journal, on Sept. 11, further articulated what Anderson said. “Although insurers maintain some number of inspectors, known as claims adjusters, across the U.S. year-round, they must redeploy staff from other areas or hire contract workers to fill gaps when catastrophes like Hurricanes Harvey and Irma strike. The speed with which they can do so is critical to residents and business owners awaiting insurance payments.”

The developing issues are complex, and readers are advised to speak with their insurance representatives regarding their individual needs.

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