| December 26, 2012
Hatteras Island Real Estate:Last
July, Congress and the President approved the Biggert-Waters Flood
Insurance Reform Act of 2012. This legislation made numerous
changes in the National Flood Insurance Program (NFIP).
Important National Flood Insurance Program changes
By TOM HRANICKA
changes, which take effect on January 1, 2013, have the potential over
time to significantly increase the cost of federal flood
insurance. The legislation and its implications can be fairly
complex, so the operative caveat when you are finished reading this
article is that you need to contact your insurance agent to understand
how the revisions directly affect your personal insurance situation.
your eyes glaze over and your head starts to ache when you read
technical information, you are in good company. With 64 pages to
digest, even insurance professionals are scratching their heads trying
to decipher the details and ramifications of the NFIP modifications
that are taking place.
Let’s start to unravel this new
legislation by looking at some historical aspects of the NFIP. In 1968,
Congress passed the National Flood Insurance Act to promote protection
against the perils of property losses due to flooding and to encourage
sound land use by minimizing the exposure of properties to flood
The National Flood Insurance Program has had a spotty
record of collecting enough premiums to cover its losses. In
technical jargon, the program has been unsound on an actuarial basis.
In recent years, the deficit has accelerated with losses of about $18
billion, mostly from Hurricane Katrina in 2005. This figure does not
include the still undetermined losses from Super-storm Sandy.
secondary issue is that since 2008 there has been no permanent
long-term funding for the NFIP program. It has been kept alive by a
series of stop-gap extensions. The new legislation includes a five-year
reauthorization of the NFIP and reform measures to assure the financial
solvency and sustainability of the program.
At this point, I
think the easiest way to begin to understand the impacts of the
legislation might be to look at the changes as they affect various
property categories and provisions contained in the bill.
first Flood Insurance Rate Maps (FIRM) were created in 1974. Properties
constructed prior to 1974 are known as Pre-FIRM. Many of these
homes were built at ground level vs. being elevated. All of these
properties currently enjoy subsidized flood insurance rates. Subsidized
rates are rates that are below the actual cost of the risk being
Beginning Jan.1, Pre-FIRM properties will lose their
subsidies over the next four to five years. Their flood insurance rates
will increase to the point where the cost of flood insurance equals the
actuarial rate for the risk. The actuarial rate is the estimated cost
associated with the true risk of loss for the property.
subsidized rates currently enjoyed by primary residences will remain in
place. To be considered a primary residence, a building must be lived
in by a policyholder or his or her spouse for 80 percent of the year.
the risk of oversimplification, secondary properties could be defined
as all properties that are not primary residences. This is the
classification into which most of the vacation rental homes and
commercial properties on Hatteras Island fall.
specifically, secondary properties include rental properties,
non-primary residences, second homes, severe repetitive loss
properties, commercial properties, properties that have incurred flood
damage exceeding their fair market value, and properties that have been
substantially damaged or substantially improved in a cumulative amount
exceeding 30 percent of fair market value.
subsidies, i.e. discounted rates, for secondary properties will be
reduced 25 percent per year with actuarial rates being phased in over
New or Lapsed Policies and New Construction
Biggert-Waters bill prohibits subsidies on new or lapsed NFIP policies.
New or lapsed policies will be charged rates associated with the
current flood risk of the property, as will newly constructed homes.
Annual Rate Increase Cap
The limit on annual NFIP premium rate increases has been raised from 10 percent to 20 percent.
structures valued at $100,000 or less, the policy deductible will be
increased to $1,500. For structures valued over $100,000, the
deductible will now be $2,000.
New Flood Insurance Rate Maps
any property that is covered by a new FIRM or that is subject to a
revision of an existing FIRM, there will be no “grandfathering” as is
the case now. For example, if your home was built several years ago,
and your flood insurance cost was based on the FIRM in place at the
time, the way it works today, you could retain the rate associated with
the original flood zone as long as your policy did not lapse.
the new rules, if a new or revised Flood Insurance Rate Map places your
property in a higher risk flood zone, you would pay the rate based on
the new flood zone. The increased cost associated with the new
flood zone would be phased in over a five-year period.
change could be important for some Hatteras Island properties,
especially oceanfront homes and those located close to the Pamlico
Sound. The last Flood Insurance Rate Map change for Dare County took
place in 2006. Prior to that time, many oceanfront and soundside
properties were located in standard risk (AE) flood rate zones. After
the map revisions, a lot of these homes were placed in a high risk (VE)
zone. It is my understanding that new flood maps are currently
a home is sold in today’s market, it is possible for the new owner to
be grandfathered at the previous owner’s NFIP premium rate
classification. Beginning Jan. 1, the new owner will have to pay the
flood insurance premium associated with the flood zone in effect at the
time of purchase.
In conjunction with the increased cost
of coverage, this change has potential significance because a borrower
must have flood insurance in order to obtain a federally guaranteed
loan. Also, the cost of insurance is included in the lenders’
calculations when they determine the financial qualifications of a
buyer for a mortgage.
Preferred Risk Policies
Risk Policies (PRP) offer low-cost NFIP coverage to owners of eligible
buildings located in moderate risk flood zones. On Hatteras Island,
this would probably include properties located in an “X” flood zone.
of Jan. 1, it appears that Preferred Risk Policies may continue beyond
a previously designated 2-year period until the Federal Emergency
Management Agency completes an analysis and implements a revised
premium structure based on the Biggert-Waters legislation.
hope that you find this preliminary look at the new National Flood
Insurance Program changes to be informative and helpful. As you
can readily see, this is not a simple topic to understand, and, of
course, this is a highly simplified explanation. Therefore, I again
encourage you to contact the insurance agent who writes your flood
insurance policy, and ask what the changes mean for your personal
I am sure that there will be a lot more
coverage of the component provisions as people become aware of the
issues and as details are clarified. I will do my best to keep you
updated as new information becomes available.
Hranicka is an associate broker with Outer Beaches Realty. Questions,
comments, or suggestions for future articles may be sent to Tom
Hranicka at P.O. Box 237, Avon, NC 27915, or e-mail to [email protected])
Copyright © 2012 Tom & Louise Hranicka. All rights reserved.