The National Flood Insurance Program, or NFIP, administered by the Federal Emergency Management Administration, has been in place for a long time as a way to help property owners hedge against flood risk. Now, more of those who have invested in real estate across the country are asking questions about their premium rates and what's likely to happen to them in the future.
As federal agencies are careful to remind property owners, most private home-insurance policies do not cover flood risk. The federal NFIP program is often the only way for a property owner to get this kind of coverage. That makes the FEMA program an essential resource for anyone with a property that may be in a flood zone or that is otherwise vulnerable to damage from rising waters.
Market and insurance changes
For several years, investors and other property owners have been hearing about changes in particularly flood-prone markets, such as in some parts of Miami, Florida or Malibu, California and other high-profile low lying areas. Other property owners have found out about NFIP coverage after major storms like hurricane Katrina or superstorm Sandy. What property owners are finding is that premiums are creeping up over time, becoming a major cost and sometimes not even covering the actual risks related to a disaster.
New flood insurance reforms
Recent news from industry sources helps to clarify some of the problems facing those with NFIP insurance coverage. The Biggert-Waters Flood Insurance Reform act of 2012 put in place some changes that will decrease current federal subsidies for NFIP policyholders.
These changes have been relevant to property owners across the country. A map from ArcGis shows more than 100,000 subsidized policies in the state of Florida, as well as more than 25,000 subsidized policies in states like California, Texas, and Pennsylvania. Many other states have between 5,000 and 25,000 subsidized policies.
In a FEMA brochure called "Changing Risks, Changing Rates," federal officials clarify that those owning investment properties or non-primary residences with NFIP subsidies will lose 25% of their subsidy annually until they reach "full rate risks."
The literature notes that the flood zones and flood planning used to calculate premiums will also be changed, which can have an effect on future coverage prices.
As for the recommendations of FEMA planners, under a category called "manage your risk," writers include relatively useless suggestions: buy flood insurance, don't let a policy lapse, and build higher if possible.
While many of these suggestions are simply infeasible for the vast majority of property owners, investors have been responding by dumping investment properties in or near flood zones and getting new real-estate investments on higher ground. That said, it can be challenging to sell a property in current markets -- especially one that has already been associated with flood risk.
Calls for rate hike controls
A Jan. 15 article in the Insurance Journal shows that Congress would like to use part of a $1.1 trillion funding agreement to delay some of the premium increases under the 2012 law. Experts characterize new proposals as delaying enforcement of higher rates under Biggert-Waters for four years.
Another point that's precisely relevant to investors is that the current FEMA plan calls for more immediate rate increases on business owners, property owners with second homes, and those who have already seen flood damage. That means investors are disproportionately in the hot seat when it comes to picking up costs from vanishing subsidies.
A warning signal for investors
A lot of this technical information goes over the finer points of how the government subsidizes big risks, and what accommodations are available to property owners. What's more evident, and often less covered, is something that should be posted in big letters wherever investors can see it: It's time to divest of flood-prone properties.
Again, the most forward-thinking people with real-estate holdings, or even derivative involvement in REITs or funds, have already moved out of the markets where properties will incur bigger and bigger premiums or even become uninsurable over time. For others, the time to act is now, before major changes or a major crisis mark a home or property as a more significant flood risk.
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Justin Stoltzfus is a contributor to WiserAdvisor.