Our Flood Insurance Program is Under Water

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The National Flood Insurance Program is teetering on the brink of its own disaster. If it fails, watch out. The impact upon homeowners in affected areas – including much of Maryland – could be a disaster into itself.

This is a topic near to our heart here at Wissel Homes because we have clients whose homes require flood insurance. And having sold this type of insurance for many years we’re in a position to know how bad this could be.

We’ve brought in some insights from Kathleen Lynn at realtor.com to tell us the not so good news.

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The National Flood Insurance Program has been swamped by billions in claims, and Congress is looking for ways to bail it out.

The Federal program — the only flood insurance available for most American homeowners — has it’s fate tied to the Federal Budget, and the looming budget deadline.

It’s been extended before, but the underlying issues have been ignored.

If it fails to be renewed, the government would stop selling or renewing flood insurance. In short, it would mean the collapse of thousands of home deals. Mortgage lenders require the insurance for properties in flood zones.

Climate Change’s Front Line

This program has larger, long-term problems, which are expected to get worse. Climate change raises sea levels and increases the risk of catastrophic storms like last year’s Harvey, Irma, and Maria.

“We know flooding is the most common and costly natural disaster in the United States, and it’s not getting better anytime soon.” Laura Lightbody, who directs the Pew Charitable Trusts’ project on weather-related catastrophes, explains.

“These events are happening not only more frequently, but [also] in places that no one would have predicted. We’ve got to face the problem head-on.”

The National Flood Insurance Program Stats

The flood insurance program owes billions to the U.S. Treasury, as a result of losses racked up since Hurricane Katrina devastated Louisiana in 2005.

The Treasury debt had soared to almost $25 billion. A bill was recently passed forgiving $16 billion of that amount. Billions more in losses are expected to hit as a result of 2017’s storms, pushing up the debt again.

The Federal program serves about 5.1 million households. Policyholders pay an average $1,100 a year for premiums and fees for primary residences, and $1,350 for second homes.

The federal government started offering the coverage in 1968. At the time, private insurance companies avoided flood risk, which they considered too unpredictable.

The program, which is part of the Federal Emergency Management Agency, was able to support itself most years—until Katrina hit, that is.

Monster Storms Are Draining The Program

Since then, the seemingly endless procession of monster storms—including some of the most damaging hurricanes to ever hit America in 2017—have roiled the waters for the program.

The basic problem is simple: The program, which subsidizes about 20% of the policies written, is not collecting enough to cover losses. Congress had passed a bill in 2012 that would have raised premiums.  After an outcry from homeowners in flood areas, some of those premium increases were reversed.

Now, Congress has new ideas on how to solve the program’s woes. The House of Representatives recently passed a bill that would save money by cutting the amounts paid to private insurers that sell and service the policies (but don’t carry the actual risk).

The House bill would also encourage private insurers to enter the market, improve flood mapping, and cap annual increases on homeowners’ premiums.

A Fight Over A Flood Program Fix

The SmarterSafer Coalition—a group of environmental, housing, taxpayer, and insurance groups that is seeking reforms on flood insurance—supports the House bill.

But it says it would also like to see premiums rise more, so that they reflect the real cost of flooding. They say that would discourage construction in flood-prone areas.

But critics of that approach say that if premiums become unaffordable for lower- and middle-income homeowners already living in flood plains, they will drop the coverage.

Then, when a flood hits, the government would end up paying more in disaster relief.

The Senate hasn’t passed a bill, but a bipartisan group of senators from coastal states—including Florida and New Jersey—have proposed the Sustainable, Affordable, Fair, and Efficient (SAFE) Flood Insurance Reauthorization Act, which would reauthorize the flood insurance program for six years.

Like the House bill, it would cut the amount paid to the private insurance companies that sell and service the flood policies. It would make it easier for homeowners to collect on claims after a flood. This follows complaints from homeowners that payouts were mishandled after Hurricane Sandy devastated parts of New York and New Jersey in 2012.

Buying Out Instead of Rebuilding

SAFE would also subsidize premiums for some homeowners, based on financial need.

It would put more money into buying out properties that have flooded repeatedly. Ideally, returning them to green space—an idea supported by the Natural Resources Defense Council. It would also increase the amount that homeowners could get for elevating their homes. Increasing the amount from $30,000 to $100,000—a more realistic number, given the actual cost of the work.

Unlike the House bill, the Senate proposal wouldn’t encourage private insurers to enter the market. Critics of that idea fear that private companies would scoop up the least risky policies, leaving the bigger risks to the government.

The Congressional Budget Office recently estimated that the federal program was running at an annual deficit of about $1 billion.

The shortfall comes mostly from coastal areas. In inland regions, homeowners with flood insurance pay more than they take back in claims, while coastal homeowners, on average, get back more than they put into the program.

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Alexander’s Note: Flood Insurance reform is a tough nut to crack. Climate change’s impact on the coastal regions has made storms scarier and more destructive.

It remains to be seen if the government should subsidize coastal rebuilding at all. Excessive premiums mean that low income homeowners are being squeezed out of their properties.

The real problem in my mind comes down to the fundamentals of insurance – and politicians control of policy costs.

Some Insurance 101

ALL insurance relies on three things. The law of large numbers of people paying into the “pot” as it were. A known (and stable) statistic on the number of accidents per thousand homes. The cost you pay out at each accident.

Let’s say you know that say 1.0% of 100 homes burn every year and your average fire payout is $10,000 amount. You’ll know exactly how much premium ($100) you need to collect from everyone else to cover that risk.

That’s how insurance should work.

Now imagine that every year twice as many homes burn and the costs for each accident are higher. Now prevent the company from increasing premiums to pay for it.

It’s a recipe for disaster.

If we want to encourage development on the coastlines, we need to have a plan for increased storm risk and insurance to cover it.

Today’s flood risks (and damages payouts) are so big that our Government must be involved. I’m a firm believer in the private sector. But in this case we need someone with a bigger checkbook to cover these costs.

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The professionals at Wissel Homes know the Central Maryland market because it’s our home too. We live and breathe the local neighborhoods in Howard County, Carroll County, Baltimore County, Anne Arundel County and more. We understand what it takes to get the job done right. Contact us today to set up an appointment to list your home or to start the home buying process. Let our experience help move you into your dream home.