RJ Lehmann

In recent months, a group of lawmakers from the Gulf Coast — led by Sen. Mary Landrieu, D-La. — in concert with some of their colleagues from Sandy-hit New York and New Jersey have been doing their darnedest to scare their constituents with tales of massive (5,000 percent!) hikes in federal flood insurance rates that will be coming, unless Congress acts to stall or repeal the reforms called for in last year’s Biggert-Waters Act.

These claims are almost entirely bunk, but they have been allowed to persist, in part, because of unclear and misleading guidance from the Federal Emergency Management Agency. In online materials, FEMA, which runs the National Flood Insurance Program, has stoked policyholders’ worst fears by pointing to rare cases where properties in very high-risk flood zones that are constructed far (five to ten feet) below the base flood elevation, where the appropriate premium might be as high as $30,000 a year.

Of course, the “appropriate” premium for such a policy should be zero dollars, because no responsible agency should insure a property that is almost certain to be a total loss. But that’s an argument for another day.

In their barnstorming tour to fend off flood reform, Landrieu and her ilk have had have one reasonable complaint, although it is something that was the inadvertant result of her and her colleagues’ own legislative grandstanding. As originally conceived, Biggert-Waters proposed including those who live behind flood levees in the National Flood Insurance Program’s mandatory coverage requirements, but charging them rates that reflected the reduced “residual” risk they faced. Gulf Coast senators fought back against the proposal and eventually had it stripped from the final law.

Unfortunately, stripping the provision also inadvertantly stripped language that called on FEMA to certify the protection afforded by levees built with state or local funds. The result is that a number of communities, particularly those in Landrieu’s Louisiana, would receive no credit for their local levees, and would be asked to pay huge flood insurance premiums as a result. More recently, FEMA announced it is addressing the oversight with a pilot program that will certify local levees in, in this case, Louisiana’s Plaquemines, Lafourche, Terrebone and St. Tammany parishes.

Alas, Landrieu has continued to push ahead with efforts to stall or repeal reforms to a troubled program that owed the U.S. Treasury $24 billion as of May and that hasn’t repaid any principal on its loans since 2010. Having tried and failed to get a five-year delay of Biggert-Waters implementation attached to water resources and agriculture bills earlier this year, Landrieusucceeded this week in getting a one-year delay attached to the committee version of a Homeland Security appropriations bill. Rep. Bill Cassidy, R-La. — Landrieu’s likely opponent in the 2014 Senate race — earlier succeeded in getting a similar delay attached to the House version of the legislation.

In making the case for delay, Landrieu and company have been throwing around those inflated claims of $30,000 flood insurance premiums to anyone who will listen. But FEMA, thankfully, is now providing clearer guidance on what updated rates will look like, and the reality doesn’t exactly match the alarmist rhetoric. For elevated risk “AE” zones — that is, properties within a 100-year floodplain that face the risk of flooding up to a given base flood elevation, or BFE — FEMA is now offering sample annual rates of $533 a year for properties that are four feet above the BFE, $1,815 for properties that are at the BFE and $10,723 for properties that are four feet below the BFE.

FEMA will be publishing more extensive rates for insurance agents in the coming weeks, and rates for the highest-risk “VE” zones — coastal zones that also face the risk of wave action from storm surge — are expected later this summer.

Now, it’s true that $10,723 is not exactly a “cheap” policy. But it is a reflection that opting to live four feet below the flood line is a significant risk, and it is simply not good policy — either insurance policy or public policy — to subsidize property owners that choose to take that risk. For the overwhelming majority of properties, the rates are reasonable, and for those who opt to elevate their properties, the savings are significant.

As the Asbury Park Press reported:

The brochure on building smarter that contained that $31,500 figure has been pulled from a Federal Emergency Management Agency website. No official from the National Flood Insurance Program or FEMA would provide the basis for that figure.

“There was a lot of confusion,” said Leo Cunningham, a hazard mitigation specialist for FEMA, explaining why the brochure was removed. “People were looking at the worst-case scenario and thought that would be their rates.”

On a FEMA document titled “The NFIP’s Specific Rate Guidelines,” the worst-case scenario has been revised:“It is important to note that a small number of flood insurance policies protecting properties in very high-risk coastal areas (VE zones) — where wave action combined with high water causes increased damage — will see significantly higher premiums which could be in excess of $20,000 in rare cases,” reads the document.

It’s also important to keep in mind what exactly it is the Biggert-Waters Act does, and doesn’t, do. Biggert-Waters made a number of changes to rates charged by the National Flood Insurance Program, although in truth, most of the changes are fairly modest. The primary change is to phase out “grandfathered” rates for some properties that either were built before the introduction of Flood Insurance Rate Maps in the mid-1970s, or in communities that joined the NFIP subsequent to the introduction of rate maps.

The law calls for certain properties — vacation homes, business properties and those that have been subject to “severe repetitive loss” — to see rate increases of 25 percent per year until premiums reflect the full actuarial rate, a process that for most properties will take about four years. The phase-out for 345,000 second homes started in January, while 9,000 repeat loss properties and 87,000 business properties will see their rates start to rise in October.

The law also calls for subsidized rates to end immediately when a home is sold, when a policy is allowed to lapse or when a property is damaged or improved by more than 50 percent. New construction within existing flood hazard zones also will be charged full actuarial rates immediately.

A separate group of policies — those that are newly mapped into flood zones or whose zone designation changes — will see their rates rise by 20 percent a year until they reach the full actuarial rate, starting with the finalization of new flood maps, which are expected by 2015.

All told, the law is projected by the U.S. Government Accountability Office to phase out subsidies for 438,000 of the NFIP’s 5.5 million policies, while retaining them for about 715,000 properties — primarily single-family homes in A/AE and V/VE zones.

But even with the bill, six states each will still have more than 40,000 subsidized properties: New York, New Jersey, Florida, Louisiana, Texas and California. Moreover, subsidized properties will still represent more than 20 percent of all NFIP-insured properties in Washington, California, Montana, Wyoming, New Mexico, Oklahoma, Minnesota, Iowa, Missouri, Arkansas, Vermont, New Hampshire, Massachusetts, Rhode Island, Connecticut and New Jersey; more than 30 percent of insured properties in Nebraska, Kansas, Wisconsin, Illinois, Ohio, Kentucky and Pennsylvania; and more than 40 percent of properties in Michigan, Indiana, West Virginia and Puerto Rico.

It’s also worth remembering to whom these subsidies have historically gone, and who will continue to benefit. Looking at the 3,100 counties in which the NFIP operates, 29 percent of the remaining subsidized rate properties are in counties that rank in the top 10 percent nationwide of median household income. By comparison, just 24 percent of the subsidized rate properties are in counties ranking among the bottom 60 percent of median household income.  A total of 65 percent of the subsidized rate policies are in counties that rank among the top 30 percent of median household income.

You see a similar picture with home values, where 43 percent of subsidized properties are in counties in the top 10 percent of home values and 69 percent are in the top 20 percent.  Less than 1 percent of all subsidized properties are in the bottom 30 percent.

Finally, in addition to FEMA offering individual policyholders opportunities to lower their flood insurance premiums by elevating their homes and engaging in other risk mitigation activities, the agency also extends that opportunity to local communities. A good case study can be found in Palm Coast, Fla., a planned community about 10 miles south of St. Augustine that sits both on Florida’s Atlantic coast and the Intercoastal Waterway.

Since joining the NFIP in 2002, Palm Coast has been a participant in FEMA’s community rating system, which awards flood insurance discounts to communities that demonstrate sound floodplain management. The community received a score of 7 on its first audit (grades are scaled 1 to 10, with 1 being the highest), which was good enough to earn the community a 15 percent discount. It improved to 6 in its 2008 audit, leading to a 20 percent discount, largely in recognition of its preservation of open space and natural wetlands buffers. In anticipation of its 2013 audit, the results of which will be released this fall, Palm Coast is looking to become one of only a handful of Florida communities to earn a 5.

City Manager Jim Landon said developers historically have kept floodplain management in mind whenever new buildings go up and city officials also know to keep high-risk flood areas devoid of structures.

“We seldom have any structural flood damage,” said Landon. “That’s really the goal for us.”

If only it were the goal for more of our friends in Congress.


RJ Lehmann

R.J. Lehmann is senior fellow, public affairs director and co-founder of R Street. He is an award-winning business journalist with nine years experience covering the insurance, banking and securities industries, and is author of R Street’s “2012 Insurance Regulation Report Card.”