The Biggert-Waters Flood Insurance Reform Act of 2012

In recent months, there has been uproar over the dramatic flood insurance rates that are coming as a result of the Biggert-Waters Flood Insurance Reform Act of 2012. Many South Carolinians, especially on the coast, will feel the impact of these rate increases. However, inland residents are being affected as well.

"We have heard of several instances of homeowners now being required to have insurance when they didn't before," said Mark Williams, town administrator for Forest Acres in the Midlands.

Standard homeowner's insurance does not cover flooding. In 1968, the federal government created the National Flood Insurance Program, which is managed by the Federal Emergency Management Agency. NFIP is now the primary source for flood insurance nationwide.

What is the Biggert-Waters Flood Insurance Reform Act of 2012?
In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act. The Act extends the National Flood Insurance Program for five years, while requiring significant program reform. The law requires changes to all major components of the program, including flood insurance, flood hazard mapping, grants and the management of floodplains. Many of the changes are designed to make the NFIP more financially stable and ensure that flood insurance rates more accurately reflect the real risk of flooding.

Because of many issues of rising rates that occurred due to the Biggert-Waters Act, Congress is attempting to mitigate the impact on property owners who live in affected areas.

In late October 2013, a bipartisan group of U.S. House and Senate members introduced legislation to delay flood insurance rate increases for most of the affected properties for four years and require FEMA to complete an affordability study, which is estimated to take two years to complete. This legislation passed the U.S. Senate in January and at press time is awaiting House action.

As a short-term fix, the 2015 spending bill that Congress passed in early February included a delay of some flood insurance rate hikes until the end of the fiscal year on September 30. This delay applies only to homeowners whose rates are subsidized because the property was built before the flood insurance rate maps were put in place, generally in the 1970s and 80s.

Why was the Biggert-Waters Flood Insurance Reform Act of 2012 passed?
Flooding has been, and continues to be, a serious risk in the United States-so serious that most insurance companies have specifically excluded flood damage from homeowners insurance. To address the need, the U.S. Congress established the NFIP as a federal program in 1968. It enabled property owners in participating communities to purchase flood insurance if the community adopted floodplain management ordinances and minimum standards for new construction. However, owners of existing homes and businesses did not have to rebuild to the higher standards, and many received subsidized rates that did not reflect their true risk. Over the years, the costs and consequences of flooding have continued to increase. For the NFIP to remain sustainable, its premium structure needed to reflect the true risks and costs of flooding. This is a primary driver for many of the changes required under the law.

Will all policyholders see changes in insurance rates as a result of Biggert-Waters?
More than 80 percent of policyholders (representing approximately 4.48 million of the 5.6 million policies in force) do not pay subsidized rates. About 20 percent of all NFIP policies pay subsidized rates. Only a portion of those policies that are currently receiving subsidized premiums will see larger premium increases of 25 percent annually starting this year, until their premiums are full-risk premiums. Five percent of policyholders-those with subsidized policies for non-primary residences, businesses and severe repetitive loss properties-will see the 25 percent annual increases immediately. Subsidies will no longer be offered for policies covering newly purchased properties, lapsed policies or new policies covering properties for the first time.

In general, which properties will be most affected by changes in rates?
Rate changes will have the greatest effect on properties located within a Special Flood Hazard Area that were constructed before a community adopted its first Flood Insurance Rate Map and have not been elevated. For many communities, the initial FIRM would have been adopted in the 1970s and 1980s. Local insurance agents will be able to provide the initial FIRM date for the community.

Many of these pre-FIRM properties have been receiving subsidized rates. Subsidies are already being phased out for non-primary residences. Under Biggert-Waters, subsidies will be phased out for businesses; properties of one to four residences that have experienced severe repetitive loss; and properties that have incurred flood-related damages where claims payments exceed the fair market value of the property. Premiums for these properties will increase by 25 percent per year until they reach the full risk rate.

Subsidies are not being phased out for existing policies covering primary residences. However, the subsidy provided to primary residences could still be lost under conditions that apply to all subsidized policies. Subsidies will be immediately phased out for all new and lapsed policies and upon sale of the property. There may also be premium changes for policyholders after their community is remapped. But that provision of the act is still under review and will be implemented in the future.

This article is reprinted in part with permission from Quality Cities, November/December 2013. Information provided by FEMA.