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The Federal Emergency Management Agency (FEMA) has been preparing to drop a seismic climate-change bomb. Flood insurance premiums for millions of at-risk homes and businesses could surge as much as four times what they currently pay over the next few years when FEMA announces its “Risk Rating 2.0.”

The breakdown in dollars:

  • Homeowners now paying $900 a year for the average flood insurance policy could see it rise to $3,500, according to First Street Foundation, a non-profit research group that assesses flood risk.
  • For the 1.5 million properties in what FEMA refers to as its “Special Flood Hazard Area,” the change in the annual price of protection could be confiscatory—almost $8,000 a year. And that’s in addition to taxes and mortgage payments.

“These are potentially devastating financial impacts that aren’t being priced into the market,” says Matthew Eby, First Street’s founder and executive director.

The burden of higher rates for flood insurance will hit the coastal states of California, Delaware, Florida, South Carolina and Washington the hardest, according to First Street. California alone has had about $1.7 billion in economic damage associated with flooding. As the nation adapts to warmer waters and climate change, other states that will face bigger losses and higher premiums include Louisiana, Mississippi and Texas.

Most homeowners and prospective buyers in flood-prone areas are unaware of what’s coming, says the Natural Resources Defense Council (NRDC). “Millions of people are investing their life savings in risky properties without knowing it,” says NRDC attorney Joel Scata.

The new rating system is already facing a challenge from New York Senator and Democratic majority leader Charles Schumer. Schumer, who represents Long Island, which was ravaged by Hurricane Sandy in 2012, has asked FEMA to “reconsider” and consult Congress before moving forward.

The new Risk Rating 2.0 rates are scheduled to take effect Oct. 1, 2021, for new policies and April 1, 2022, for existing policies. It’s not clear yet if Sen. Schumer’s objection will affect the rollout.

“Beachfront Bailouts”

There’s no argument that FEMA shouldn’t update its clunky, outdated and politically motivated metrics for assessing who’s at risk of having their home washed away.

“Risk Rating 2.0 is long overdue,” says Carolyn Kousky, director of the Wharton Risk Center at the University of Pennsylvania.

How long overdue? FEMA’s rating system hasn’t been updated much since the government’s flood insurance program began in 1968. It was started because private insurance companies refused to write flood policies that weren’t profitable. Instead, the federal government took on the risk through the

National Flood Insurance Program (NFIP), selling insurance for low prices that didn’t account for the actual risk of claims. The NFIP has lost an estimated $50 billion. Even after repeated taxpayer-funded bailouts, FEMA’s National Flood Insurance Program is still $20.5 billion in debt.

Worst still is the “regressive” way it’s run, says Wharton’s Kousky, because “low-value homes pay too much and high-value homes pay too little.” It’s a practice that insurers contemptuously refer to as “beachfront bailouts.” A study by the Natural Catastrophe Insurance Program found that those with household incomes of more than $106,000 accounted for nearly half of the claims, while the lowest income groups filed less than 16%.

FEMA’s cheap flood insurance encouraged development and created a lucrative housing boom for realtors and contractors in often-flooded states such as Florida. Policies were renewed multiple times even after homes were damaged or destroyed. About one-third of Americans now live in coastal areas.

CAT Modeling

FEMA is playing its cards close to the vest prior to the Oct. 1 rollout of its new flood insurance rates, and the announcement of the new rates has already been delayed by a year. But based on its public announcement, Risk Rating 2.0 will be similar to what private flood insurers are now selling.

FEMA has been using broad-based “100-year flood zones” that were expected to flood once every 100 years to assess the risk that water will damage or destroy a home. Instead, these areas are enduring 10-

year or even annual flooding.

But now FEMA will enlist professional catastrophe (CAT) modeling firms that regularly assess the risk of hurricanes, wildfires and even earthquakes. It will use computer technology to drill down to the individual characteristics of each property it insures. These characteristics include the specific elevation, replacement costs and whether the home has been elevated on pilings.

FEMA intends to reach farther out beyond traditional flood zones to assess 2.7 million at-risk properties outside these current flood zones, so their rates could also climb.

“An estimated 20% of flood claims come from low-to-moderate flood-risk areas and most natural disasters in the U.S. are tied to flood,” points out Luis Gazitua, a principal in JAG Insurance Group.

First Street Foundation has an online Flood Factor tool that allows homeowners to see their flood risk and estimated flood damage costs.

Abandoned Homes on the Horizon?

Homeowners in these Special Flood Hazard Areas with a federally backed mortgage are required to have flood insurance, whatever the cost. This could lead to a recession in some coastal areas, warns Sarah Pralle, a political science professor at Syracuse University.

For homeowners, or prospective buyers, “rising insurance rates could lead to a reduction in home values,” Pralle says, and “they could be forced to sell at a loss, or even abandon their property.”

Pralle agrees that flood insurance has to change, but the government needs to “help vulnerable communities and homeowners who’ll struggle with the transition.”

Many people—even real estate professionals—aren’t aware of the coming changes. Kim Hanadel, a realtor in Manahawkin, New Jersey, which was flooded by Hurricane Sandy in 2012, says, “I have not heard anything . . . and no one else seems to know.” She even checked with her flood insurer, who wasn’t aware of it either.

The NRDC survey showed that shorefront states like Florida and Virginia, as well as many others, have no requirement that a seller disclose past flood damage. And the state of New York allows a seller to pay $500 NOT to disclose previous flooding, according to the NRDC.

Flood Insurance Sticker Shock

Those already residing in flood-prone areas who have to buy flood insurance are eligible to be grandfathered. Federal law states that FEMA can only raise rates by 5% to 18% a year. But that means that premiums could climb by more than 60% in three years. And it only applies to those who already have flood insurance, or who are buying a home with an existing flood insurance policy. “First-time buyers could experience sticker shock,” predicts Gazitua.

One positive is that flood insurance rates will be fairer. “Some property owners may find that their premiums are reduced rather than increased,” predicts First Street, particularly since the largest increases would be along coastal communities within higher socioeconomic zones where the cost of flood insurance is not a major financial consideration.

Higher rates would also encourage communities and homeowners to protect themselves—and lower those premiums—with flood barriers and by raising their homes on pilings or “stilts,” insurers say. And that’s already happening in many towns inundated by previous hurricanes and floods.