If all goes as planned, legislation was filed Friday for a vote this Wednesday on changes to the Biggert-Waters Flood Insurance Reform Act. From what I have been able to draw from various news sources, two of which are linked at the end of this post, is the following:
- Flood insurance rates nationally will increase on average no greater than 15% per year until property owners reach the true actuarial risk associated with flooding. As this is a national average, there will be a maximum increase of 18% per year limit for any individual homeowner.
- The maximum annual insurance premium for any homeowner should not exceed 1% of the total premium value, again for most homeowners. What this means is, we can place a real number into the equation of what it will cost, a maximum insurance premium for structural insurance would be $2,500 on a $250,000 maximum policy. I am sure that there will be some form of deductible needed to accomplish this but it is a good start.
- Grandfathering is reinstated, the articles do not provide significant information on the nature of this reinstatement. Clearly, all reports out of Washington have stated grandfather rates will be protected for primary residence transfers. There is nothing yet to clarify whether non-primary residences will have any protection.
- There will be a “surcharge” placed on all policies to minimize the tax ramifications of these changes. Residential policies will see a $25 per year surcharge and non-residential policies will see a $250 per year surcharge. These surcharges are designed to soften the impact of the delayed revenue collections found in Biggert-Waters.
These changes should help provide some stability to the area housing market, at least the primary residence one. People know what to expect when buying a home and how much their insurance rates will climb each year until full actuarial rates are collected.
A few thoughts.
- I am not sure 1% of premium is “full-actuarial” cost of flood insurance for all properties. A property closer to the water, the so-called “repetitive loss” properties obviously are damaged more often than once every 100 years. These properties will continue to be subsidized, essentially through the costs for properties less likely to be damaged and through the surcharges on all other properties.
- Premium value does not necessarily reflect actual risk. FEMA allows for insurance of up to $250,000. In MA there is legislation pending to restrict insurance premiums to no more than what someone owes to a bank on their mortgage, up to the $250,000 maximum. Of course, this means someone could be insured for this amount and find, just as easily, their true actuarial risk runs only $30,000 (1% premium being $300 rather than $2,500). Hopefully a balance will come.
- The “surcharge” will result in those who are paying full actuarial risk, or over such costs, to pay for those who are still below the full actuarial risk.