A typical premium charged by the National Flood Insurance Program is slated to rise about 8 percent in the coming year, with the estimated average premium going from $866 to $935.

When various surcharges are added, the total average amount billed a policyholder will increase to $1,062. However, the premium hikes are likely insufficient to keep the program from sinking into debt, according to a recent government report.

The higher premiums and other changes for new businesses and renewals began April 1, according to the Federal Emergency Management Agency (FEMA) in a bulletin summarizing NFIP changes effective April 1, 2018. The changes bring the NFIP in line with provisions of flood insurance reform laws, including the Biggert Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014.

The 2012 and 2014 flood insurance laws’ requirements behind the premium and surcharge increases include:

  • Premium rates for four categories of Pre-FIRM subsidized policies—non-primary residential properties, business properties, severe repetitive loss (SRL) properties (which includes cumulatively damaged properties), and substantially damaged/substantially improved properties—must be increased 25 percent annually until they reach full-risk rates.
  • The average annual premium rate increases for all other risk classes are limited to 15 percent, while the individual premium rate increase for any individual policy is simultaneously limited to 18 percent.
  • The average annual premium rate increase for all other Pre-FIRM subsidized policies not covered by the 25 percent category above must be at least 5 percent.
  • There are some limited exceptions to the 18 percent cap on premium rate increases for individual policyholders. These include policies on the properties that are subject to 25 percent annual premium rate increases.

The surcharges are not considered premium and, therefore, are not subject to the premium rate cap limitations. As a result, the increase in the total amount charged a policyholder may exceed 18 percent in some cases.

On March 23, the NFIP was reauthorized until July 31, 2018. The extension was included in the $1.3 trillion omnibus spending bill signed by President Donald Trump.

The disasters of 2017 created one of the busiest years for the NFIP to date—by the end of last year, FEMA said the NFIP had paid out more than $8 billion in flood insurance claims during 2017.

Last October, Congress passed and President Trump signed into law a hurricane and wildfire disaster relief bill that provided $16 billion in debt relief to the NFIP, which was about to run out of money to pay claims from hurricanes because it had reached the $30 billion limit on its ability to borrow from the U.S. Treasury.

According to a Congressional Budget Office (CBO) report issued last fall (National Flood Insurance Program Financial Soundness and Affordability), these latest premium increases are unlikely to keep the NFIP from eventually falling into the red again. That’s because the NFIP’s current approach to setting premiums has underestimated how much its claims will cost by about $1.1 billion and legislated surcharges are about $300 million shy of covering the premium discounts given to certain properties, according to the CBO.

CBO concluded that the overall NFIP shortfall is largely caused by underpricing in coastal counties, which account for three-quarters of all NFIP policies nationwide. The difference is largely due to legislated subsidies built into the NFIP and FEMA’s rate-setting system, both of which it says favor coastal policyholders.

Yet despite being favored in pricing, the number of coastal homes with flood insurance has been falling, according to a report by The Associated Press. Why the decline? The report cited rising premiums and banks not enforcing the requirement that any home with a federally insured mortgage in a high-risk area have flood coverage.

The House has passed several reforms of the NFIP, but the Senate has not advanced any measures.

*This story ran previously in our sister publication Insurance Journal.

Topics Trends Flood Pricing Trends