National Flood Insurance Program Rates Head Upward for Many Homeowners

It’s spring, and the inevitable increase in National Flood Insurance Program (NFIP) premiums has gone into effect. 
According to the NFIP, the average premium will rise by 8 percent, but that figure does not include surcharges some property owners pay.
Federal Emergency Management Agency (FEMA) data shows that the average New Jersey policyholder pays about $1,000 a year. Some vacation homes and commercial properties will see increases as high as 25 percent.
New Jersey is fifth among states when ranked by the number of policies in force. Unsurprisingly, the rankings are dominated by states with vulnerable, exposed coastlines.
Florida leads the list followed by Texas and Louisiana. Rounding out the top five are California and New Jersey. Those top five states account for two-thirds of all the NFIP policies in force nationwide.
New Jersey has 226,696 policies with the NFIP covering $56.5 billion of insured value and costing $221 million in policy premiums. Sixty percent of that coverage is in the three counties of Cape May, Ocean, and Atlantic.
Cape May County and the NFIP
Cape May County makes heavy use of the NFIP. Using 2017 assessment data and NFIP insured value data from January of this year, 27 percent of the total aggregated assessed value of the county is insured through the NFIP.
That rises to almost one-third of assessed value when one counts only the island communities.
In the Wildwoods, for example, the NFIP insured value as a percentage of aggregate assessment value ranges from 41 percent in Wildwood Crest to 54 percent in Wildwood.
For the county as a whole, the NFIP carries $12.8 billion in insured value as of January. County property owners pay $38 million in premiums for that coverage.
Regarding municipalities in the county, Ocean City leads by a large margin with 31 percent of the total NFIP policies in force, accounting for 32 percent of the total insured value in the county.
Cape May County alone accounts for almost a quarter of the total insured value in New Jersey which is, in turn, the fifth state in the nation in NFIP policies.
This all makes any changes to the NFIP of great importance to the state and county.
Structural Problems of the NFIP
The NFIP began in 1968 when private insurers began leaving the market rather than deal with escalating costs from catastrophic flooding.
The program has had problems for years and is currently $25 billion in debt, a debt which FEMA executives say the program will never be able to repay.
Premiums received are not keeping up with claims and payments. This is in part due to the increasing frequency of major storms devastating either the Eastern Seaboard or the Gulf Coast. But the imbalance between premiums and claims is also due to the nature of the program itself which does not have the flexibility a private insurer would have to respond to the financial drain in recent years.
The Government Accountability Office (GAO) listed the NFIP on its list of high-risk government programs for over a decade.
In its 2017 High-Risk Report, the GAO noted that the “NFIP’s overall rate-setting structure was not designed to be actuarially sound.”
In short, this is a government program with politics built into its structure.
Roughly 20 percent of property owners in the NFIP pay premiums too low to cover the real risks associated with the property. For a variety of reasons, other properties are “grandfathered” even when the property is reclassified into a higher-risk zone.
Rates are not set based on individual structures but rather based on average home prices within a zone.
Most notably, Congress also sets rate increase caps which the NFIP cannot exceed in any given year.
Even with these hidden subsidies, affordability remains a major political issue. More frequent storms and threats from sea level rise batter the NFIP which also faces advocacy groups wanting to stop actions that would significantly increase premiums. 
One such group started by a Toms River resident is Stop FEMA Now which argues that most bills proposed in Congress to deal with the financial state of the NFIP would raise premiums to levels that would force residents to sell their coastal homes.
One response has been a government focus on mitigation efforts providing funds for expensive mitigation projects and incentives for community efforts by offering insurance discounts through the Community Rating System (CRS).
Critics say the program unfairly taxes all Americans to facilitate people living in areas with high flood risk.
Reauthorization
Political differences are often resolved for good or bad when government programs are reauthorized. The NFIP was due for reauthorization in September 2017.
That “can” has been kicked down the road several times with short-term authorizations. The program is set to expire July 31.
While no one expects the program to end, there may be a lively debate about changes.
Already Congress has allowed the NFIP to build a sounder fiscal base by tapping reinsurers and even capital markets. The Insurance Journal recently reported that FEMA plans to engage capital markets in July through an “insurance-linked securities (ILS) transaction.”
That is essentially the packaging of some combination of specific risk-level policies for sale to investors who reap the rewards if all goes well and share the pain if catastrophic events occur.
Even with such new tactics, reauthorization is likely to see increased pressure to move to market value premium structures, the end of grandfathering rates when properties are sold and higher rates for vacation homes.
Indecision carries its own dangers as well. Should squabbling in Congress result in any lapse in the program, the National Association of Realtors estimates that any lapse might impact as many as 40,000 home sale closings per month.
No one knows what Congress will do, but the issue is one of paramount importance to a county surrounded by ocean and bay.
To contact Vince Conti, email vconti@cmcherald.com.