| December 4, 2013
Hatteras Island Real Estate: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.”
Perspectives on national flood insurance changes
By TOM HRANICKA
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.
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.
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.
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
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.
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.”
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
• 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
With these comments and observations as background, what conclusions can we reach?
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:
- Stay informed. At the end of this article are several references to help you understand the legislation and the issues.
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.
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.
FOR MORE INFORMATION
You may find these references helpful in understanding the issues associated with the NFIP changes:
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.