The last time the federal government overhauled its flood insurance program, Richard Nixon was president and Pink Floyd’s “The Dark Side of the Moon” topped the U.S. charts.
A lot has changed in the nearly 50 years since. Climate change has progressed, and persistent flooding has become commonplace in coastal communities across the country.
Having paid out tens of hundreds of thousands of claims since its formation in 1968, the National Flood Insurance Program is now more than $20 billion in debt.
To make the program more financially sustainable, FEMA has begun implementing a new pricing system, known as Risk Rating 2.0, sending some property owners in South Florida into a panic out of fear that their rates will skyrocket.
Although FEMA has said that the majority of policyholders across the country won’t see huge increases — annual hikes are capped at 18 percent, and two-thirds of policyholders will see monthly increases of $0 to $10 — those in low-lying, coastal areas are skeptical.
“Because this is the government, not everything is crystal clear,” said Brian Boak, director of risk management for the property management firm AKAM. “The idea of this was to make it more transparent, and now it’s less transparent.”
Insurance broker Luis Gazitua said the process has been “frustrating” because each property is priced individually, and there is no clear formula for how a rate is calculated. The impact of the changes won’t be fully known to policyholders until it goes into effect next spring. (While the rates for new policies are effective Oct. 1, those with existing policies will be subject to the new rates on April 1.)
“What’s happening is [annual] rates could be $100 more, or they could be $2,000 more,” Gazitua, a partner at Miami-based JAG Insurance, said. “Flood insurance may be more expensive than homeowners’ insurance for some people.”
Wildly different prices
Property owners in high-flood-risk areas with government-backed mortgages are required to have flood insurance, either through a private insurer or an NFIP policy.
In South Florida, the change in the federal flood insurance program probably won’t deter buyers seeking multimillion-dollar waterfront homes. High-end home sales are surging throughout the region, and all-cash deals — meaning those in which no lenders are involved — are increasingly frequent. In Miami-Dade, cash sales represented 38.5 percent of all residential deals in the third quarter, according to the Miami Association of Realtors — 67 percent higher than the national average.
But the change in flood insurance rates, in addition to other rising property insurance costs, could price some buyers out of the market or push them to more affordable properties.
The new rating system takes into account characteristics of specific properties, meaning an older home on the water may have a much higher premium than the modern mansion next door, resulting in “wildly different prices,” Gazitua said.
“I don’t think you’re going to see deals in the luxury market not go forward. But on the lower end, let’s say $1 million and under, the flood insurance rate could throw off the debt-to-equity ratios,” said Compass agent Josh Dotoli.
The new system is intended to make pricing more equitable and representative of a property’s flood risk so that the national flood insurance program can survive in the long run, FEMA has said.
“Flooding should not just be limited to high tides and sea level rise,” Dotoli said, adding that FEMA is now considering rainfall and storm surge, as well as proximity to other bodies of water. “Those are really good, positive changes.”
Dotoli is working on one deal in which the buyer was required to secure flood insurance to enter into a purchase contract for a waterfront home in the Florida Keys.
“Buyers purchasing waterfront property are going to be much more aware and ask themselves, ‘What flood zone is this property in and how will this impact me in the years to come? Is my property at risk?’” Dotoli said. “Several years ago, buyers never asked that.”
FEMA’s new system could also make newer homes, especially those built at higher-than-required elevations, more desirable.
“You go into some of these older homes that sit at the existing grade, which is usually below where FEMA wants to be. You have to tear them up,” said Miami-based architect Reinaldo Borges. “It is kind of crazy that people are coming to South Florida and they are not really concerned with that future.”
Despite efforts to improve the flood insurance program and the development of more resilient buildings and infrastructure, climate change has already taken its toll on parts of South Florida.
Monroe County, which includes the Florida Keys and parts of the Everglades, was allocated $15 million to buy homes in high-flood-risk areas that were impacted by Hurricane Irma and convert them to green space. The deadly 2017 storm destroyed more than 1,000 homes in the county, including about a quarter of those in the Keys, and caused substantial damage to another 3,000.
More than 90 percent of national flood insurance policyholders in the Keys will see their rates increase come April 1, said Lisa Tennyson, Monroe County’s director of legislative affairs. Monroe has the greatest percentage of NFIP policyholders in the country.
Tennyson called the new criteria for calculating premiums “highly unfavorable to coastal communities,” and said, “we’re a little concerned and highly skeptical about FEMA’s projections.”
“In the legacy program, FEMA used the base flood elevation flood zone,” she said. “Under the new rating scheme, they are looking at individual properties and those characteristics, like how close you are to a water body, the type of construction, the propensity for storm surge and excessive rainfall, the frequency of flooding, the cost to reconstruct and flood claims history.”
Tennyson said she is focused on lobbying legislators to lower the cap on annual increases.
“When you’re already paying $3,000, $4,000 or $5,000 in flood insurance, that kind of increase is very steep,” she said.
Still, real estate and insurance brokers agreed that the legacy program is antiquated and unsustainable, especially as major storms increase in frequency and intensity. Four major hurricanes among 21 named storms caused an estimated $70 billion in damage this year — the third-most-active and fourth-costliest Atlantic hurricane season on record, trailing only 2017, 2005 and 2012.
Ryan Papy, president of Keyes Insurance, said there has long been a scare factor in terms of updating the program. “You had a program that was not financially efficient, nor was it meeting the standards set. There wasn’t much room for improvement,” he said.
Lawmakers’ previous effort to make the program financially sustainable, the Biggert-Waters Flood Insurance Reform Act of 2012, resulted in huge rate hikes, which Rep. Maxine Waters, one of its co-authors, called an “unintended consequence.” Portions of the legislation were eventually scaled back or repealed.
Boak, of the property management firm AKAM, said the old rates were not actuarially sound, and that’s bad for the market at the end of the day.
“The cost of the insurance should be the cost of the insurance. It shouldn’t be subsidized,” he said. “If you want to live with a great view of the water, you should pay for a great view of the water.”