Wednesday, April 16, 2014

Flood Insurance – Postponement is not a Solution

The Biggert–Waters Act of 2012 was aimed at tackling the crippling $24 billion deficit that the National Flood Insurance Program (NFIP) found itself in. The massive subsidies that the Program had to bear created a situation where the continuation of the system was unviable. The reform of 2012 was aimed at rationalizing the premiums so that the Program could become financially viable and stop being a massive burden on the taxpayers. This makes sound economic sense but the problem is that the sharp increase in insurance rates could cost millions of people across the country to lose their homes or face. How bad is the situation? An example would be a Long Island homeowner who still has a hole in her house from Superstorm Sandy. Her flood insurance premiums have gone up from a pre-Sandy amount of $850 to $2,200 now. Or take the case of a Penn. homeowner put his home up for sale but was as surprised as the prospective buyer to find that the new annual flood insurance premiums would be over $7,000 higher than the mortgage payments for the same period. Not only did the sale not go through, the seller knows no one will buy the house with that kind of financial burden attached to it. There are millions of cases like this across the country.

Postponement is Good, But…….

The effect in human terms of these homeowners would be catastrophic. And financial impact on an economy that is still not through with its recovery would massive. That is why lawmakers have no passed another reform that will delay the proposed increases, at least partly. For businesses and owners of second homes, the increase will be mandatory 25% per year. For other the increase is now capped to 18% a year, but FEMA had the option to reduce the amount of the increase. This is good news, but all that it really does is to postpone the day of reckoning. FEMA now has 18 months to submit an already overdue report on flood insurance affordability. It has 36 months to find a way to help policy holders who cannot afford the increased rates. A target of limiting annual premiums to $2,500 for $25,000 in coverage exists, but how is this to be reached without bankrupting a program that is already charging more than that in many cases?

Over 1 million policy holders will see their premiums rise significantly over the next few years. There are hundreds of coastal communities, port towns and river cities where the increase in rates will make it very difficult for people to keep their homes. But if the premiums stay low as they are now, any serious flooding could cost the taxpayer billions of dollars.

Using the Respite Wisely

Homeowners cannot afford to have the situation continue to drift in the way it has over the last few years. At the same time, the Program cannot be allowed to remain a burden on the taxpayer. Many proposals are emerging that could help to achieve a balance between protecting the homeowner and enabling the Program to stand on its own feet. Among them are giving vouchers that can be used to offset the rate increases to those who elevate their home on pilings, high foundations etc. Raising homes is expensive but the cost, in terms of loan repayment, could be less than the proposed increase. Some form of relief from the rate increases for those who are unable to raise their home but can move electrical and heating equipment to less vulnerable areas and are able to install water tight doors and windows is another possibility. There is also a private flood insurance program that costs only half of what NFIP does and also does not need an elevation certificate which cost $1000 and is required by the NFIP.

The latest reform has given homeowners and lawmakers a little time. It must be used wisely. It will be a shame if, a couple of years done the road, we continue to be faced with the problems of an unviable flood insurance program and rate increases that will cause people to lose their homes.

Have questions about your flood insurance and home insurance? Insurance by Allied Brokers can help you. The expertise we have gained over the 50+ years of our experience in the Bay Area will make it easy for you to find the best coverage at the best price. Call us at (650) 328-1000.

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