December 4,  2013

Hatteras Island Real Estate:
Perspectives on national flood insurance changes


During the past year, I have written several articles addressing important changes in flood insurance associated with the Biggert-Waters Flood Insurance Reform Act of 2012. This statute is rapidly becoming another poster child for “legislation that was passed in order to understand what was in it.”

Some critics are saying that as a result of the legislation, flood insurance premium increases will be so great that some people will not be able to afford to stay in their homes. Others are saying that the changes may not be all that bad, and still others admit that they just don’t know what the fallout from the legislation will really be like. 

In fact, all of these opinions are almost certainly true depending upon individual case circumstances, but the most accurate statement at this point in time is that no one knows or can know what the ultimate future impact of the National Flood Insurance Program (NFIP) changes will be on an individual policy holder.

Let’s try to make some sense out of this situation by summarizing a few facts that are known.

The NFIP essentially collected enough premiums to cover its claims until hurricanes Katrina, Rita, and Wilma struck in 2005. Since then the program has been operating at a deficit. In an attempt to make the program financially self-sustaining, Congress passed the Biggert-Waters legislation. This goal is both reasonable and responsible.

Some NFIP policies, known as Pre-FIRM policies, have been subsidized, meaning that the costs that policyholders have been paying are lower than the true cost of the risk that is being insured. At the peril of oversimplification, the 2012 law phases-out the subsidies on these policies, increasing the premium cost over a four-year period to reflect the actuarial risk.

As with all legislation, there are exceptions, one being that Pre-FIRM primary residences will continue to enjoy subsidized rates until they are sold, the policy lapses, the property suffers severe, repeated flood losses, or a new policy is purchased. If any of these situations occurs, the new owner will have to pay the flood insurance premium associated with the flood zone currently in effect for the property.

Properties that were constructed prior to 1974 are known as Pre-FIRM properties since they were built before flood insurance rate maps were first introduced. As I understand it, these homes have the potential to experience the greatest rate increases because many of these properties were built at ground level or have ground level enclosures, and all of these properties currently enjoy subsidized rates. Ordering a new flood elevation certificate for Pre-FIRM properties could potentially produce significant cost savings.

A flood elevation certificate is a written certification by a professional surveyor or other authorized official indicating the height of the lowest floor of a building in order to determine the proper flood insurance premium for the property.

Owners of all other properties should probably wait to order new elevation certificates until after revised flood maps for Hatteras Island have been introduced. Preliminary flood maps are expected to be available for review around the end of 2013 with an effective date sometime in 2015.

In a typical Pavlovian response, after the Biggert-Waters legislation was enacted and after legislators began hearing from their constituents about the potentially adverse financial impact of the changes, bipartisan bills to address unintended consequences of the original legislation were introduced in both the Senate and in the House of Representatives. Known as the “Homeowner Flood Insurance Affordability Act of 2013,” the bills are intended to delay some flood insurance rate increases for four years until the Federal Emergency Management Agency (FEMA) completes a previously mandated study on the affordability of the new rates and proposes solutions to situations involving the most severe increases.

One aspect of the pending legislation that affects our local real estate market is that Pre-FIRM second homes, rental homes, and businesses are excluded from the delay in rate increases proposed in the Homeowner Flood Insurance Affordability Act of 2013. The Senate bill in particular would only apply to primary homes, non-repetitive loss residences that are currently grandfathered (pay lower insurance rates even though the risk of loss may have increased), all properties sold after July 6, 2012, and all properties that purchased a new policy after July 6, 2012.

Observers of the political process note that prompt enactment of this relief legislation is certainly not guaranteed. While we really don’t know what Congress will end up doing, some political insiders predict that there is a strong chance that the legislation will be approved by the end of the year.

Pre-FIRM second homes, rental homes, and businesses were also excluded from favorable provisions in the original legislation.  I have heard on numerous occasions that the reason for these exclusions is the mistaken belief that “people who own vacation homes are rich” and therefore, should not be given any advantageous treatment in the laws.  An example of this misconception was contained in the lead sentence of a Dec. 1, 2013 article in the usually conservative Wall Street Journal – “Federal flood insurance is a classic example of powerful government aiding the powerful, encouraging the affluent to build mansions near the shore.”

The facts simply do not support this erroneous point of view.  According to the National Association of Realtors Investment and Vacation Home Buyers Survey 2013, the median household income of vacation home purchasers was $92,100, and the median household income of investment property buyers was $85,700.

In addition, owners of second homes are already disadvantaged when they purchase a National Flood Insurance policy in terms of the amount that the insurer will pay in the event of a loss. The flood insurance coverage provided to primary residence homeowners are “replacement cost” policies with a maximum coverage limit of $250,000. Replacement cost is defined as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. On the other hand, second home owners can purchase only “actual cash value” policies, which in its simplest form equates to the cost to repair or replace the damaged property minus depreciation.

While the actual impact of the Biggert-Waters legislation is virtually impossible to quantify for individual property owners at this time, some general observations are starting to emerge. The association of Independent Insurance Agents of North Carolina recently sent a communication to its members which, in part, contained the following information:

Recent data as of 12/31/12 from FEMA indicates the following:

• 81 percent of NFIP policyholders already have actuarial rates and will be unaffected by the Biggert Waters Flood Insurance Reform Act of 2012. (This includes second homes, rental properties, and business policies that became effective after flood insurance rate maps were introduced in 1974, i.e. most properties on Hatteras Island.)

• 10 percent of NFIP policyholders have pre-FIRM primary dwellings and will retain their subsidies until sold to a new owner or their policy lapses.

• 4 percent of NFIP insured properties are pre-FIRM condos or multifamily properties that will not see immediate increases.

• 5 percent of NFIP insured properties are pre-FIRM non-primary residences, business properties and Severe Repetitive Loss properties and will get 25 percent annual increases until their rates are unsubsidized.

With these comments and observations as background, what conclusions can we reach?

I think that the most relevant point is that the sky is not immediately falling. However, we should not become complacent concerning the changes that are taking place in the National Flood Insurance Program.  The cost of flood insurance can be expected to increase.

It will be especially important to be aware of and to understand the individual impact of the pending new flood insurance rate maps since changes in the flood zone classification of a second home, rental property, or business could cause current premium costs to increase with the increase being phased in over five years until the revised full actuarial rate is reached.

It should also be noted that it is possible that some homeowners could experience premium decreases in connection with the new flood insurance rate maps.  We should also carefully watch what is happening in Congress relative to amending the Biggert-Waters legislation.

These are my suggestions for a prudent individual plan of action:

  1. Stay informed. At the end of this article are several references to help you understand the legislation and the issues.
  2. Contact your Congressional representatives, and ask them to support the legislation proposing delays in enactment of the rate increases. Be sure to emphasize that any discrimination against second homes should be eliminated and that second homes, rental properties, and businesses should be treated the same as primary residences. 
  3. Stay in touch with your personal insurance agent to be aware of the potential effect of the NFIP changes and the pending flood insurance rate map revisions on your individual situation and what you might be able to do to minimize any adverse impact.


You may find these references helpful in understanding the issues associated with the NFIP changes:

(Tom 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.

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