There’s been a lot of news lately about floods. From the floods in Canada just a couple months ago, and to the more recent floods in Colorado, it seemed flooding was already at the front of many minds when news reports came out regarding the changes to flood insurance policies and premiums in the US.
We have friends that follow this type of news very closely, so we’ve known for a while that changes to flood insurance premiums and policies were a possibility in coming years. And before our most recent flood insurance renewal for our duplex we received a notice in the mail saying that subsidies on flood policies for investment properties would phase out beginning in 2013, and that subsidies for primary residences would phase out beginning in 2014.
I wasn’t really worried about any of this – particularly with our duplex property since we could technically close our HELOC on that property and not be forced to purchase flood insurance there. But some of the more recent news reports on the changes to the flood insurance program have been filled with some pretty extreme rhetoric…
“On this house, for $250K of insurance, the rate was going to be $45,663 and some odd cents per year. Well, you know, you can buy this house in five years of that.”
“[The Bill] seemed like a good idea at the time, and it was, but the way implementation is being proposed, it will indeed have a devastating impact … on all Floridians.”
“And it’s not just Florida. In New York, Massachusettes, Louisiana and even Iowa, homeowners and their elected officials are working to pressure Congress…”
“Some predict the new rates will lead to lower home values, depressed sales, and even a new round of foreclosures in some coastal communities.”
And these were quotes from the typically not-hyperbolic NPR. After reading this, I didn’t panic, but it did make me pause. “Maybe this was something that we actually did need to start preparing for…” I love our little house, but if our flood insurance premium was increasing to $10K+ per year (it’s currently ~$350), we’d have to do some serious consideration.
This is going to be a two-part post that will touch on these main items.
- Unravel the Flood Insurance Vocabulary – understanding what goes into setting flood insurance premiums in the US (the rest of this post)
- Why Were Some Policies Subsidized, but Not Anymore? – The original intent behind subsidies to some flood insurance policy holders and why that policy has changed. (next post)
- Is My Current Policy Subsidized? – How current policy holders can look up their locations and determine if their policies are subsidized. (next post)
- What’s My Future Risk? – For current policy holders and non-policy holders, how to look at FEMA’s maps and make informed decisions about your flood risk and need for flood insurance. (next post)
Step 1 – Unravel the Flood Insurance Vocabulary
Flood insurance in the U.S. is ridiculously complicated. I’m going to try and sift through what you you need to know to make some educated decisions, but it requires a little bit of alphabet soup to get there. Bear with me as I try and explain some of this essential (but often unknown) background.
First things first. Flood insurance is not just for property owners. Contents only policies are available for renters, though not required, and moreover landlords are not generally required by law to notify tenants if the building they are renting lies in a flood zone. Renters, this puts you at potential risk. A typical renter’s insurance policy does NOT cover flood insurance.
What’s “THE BILL”?
The big deal that’s going on is that in 2012 Congress passed the Biggert-Waters Flood Insurance Reform Act. Basically FEMA (Federal Emergency Management Agency) was broke after major payouts due to Hurricane Katrina and “Super Storm” Sandy. It had $24B in debt, and Congress decided that one of the best ways to fix this debt was to eliminate subsidies on flood insurance premiums run by NFIP (the National Flood Insurance Program).
Phase-outs on subsidies for flood insurance premiums began for investment and vacation homes on January 1, 2013, and for primary residences on October 1, 2013. Hence, all the news articles that profiled people freaking out at the end of September.
FIRMs and Market Rates
FEMA creates the FIRM (Flood Insurance Rate Map), basically maps that cover most of the country which describe what the likelihood of flooding is at a particular address. The benchmark is that if you are in a 100-year flood plain (ie there is a >1% chance of flooding in any particular year), you need to have flood insurance to have a mortgage. FEMA calls these 100-year flood plains SFHAs (Special Flood Hazard Areas) and uses the zone codes “A” and “V” to represent them on their maps.
Flood Zones, Alphabet Soup On The Map
When you look at the FIRM (remember it’s a map), you see areas with lots of different shadings that show you what the relative chance of flooding is in that area. These are called the rate zones, so your flood insurance premium ends up being based (at least in part) on what rate zone your structure is located in. The most common rate zones (and easy ways to remember what they mean are):
- X = X-cellent, Low-moderate risk (zones B & C are also in this category)
- A = A Hassle! Moderate-high risk, need elevation certificates (also expressed as AE, AO, AH, or AR with the second letter indicating what TYPE of flooding is most likely to occur in those areas)
- V = Very high risk; usually for coastal areas (also expressed as VE)
- D = Data missing, FEMA doesn’t have enough information to evaluate risk in this area
Zones A and V are the zones that are considered SFHAs. If you live in one of these your mortgage holder probably required you to have flood insurance. Though, if you are in an X, B, or C that doesn’t mean you should stop reading this series…
BFE, Not What Urban Dictionary Thinks
Rate zones A and V are partly defined by a given BFE. Here, unlike in urban dictionary, BFE stands for the Base Flood Elevation. This is the reference elevation for that part of the map which helps determine what elevation the 1% flood zone is at. The BFE becomes your reference point, so what matters is how much above the BFE your structure is.
For coastal areas, like where we live, the BFE is typically 0. So what gets measured is absolute elevation rise from sea level. In the nearest floodplain to my parents’ house in a decidedly non-coastal area, the BFE is 2,456 feet. So if their house was located within that flood plain (instead of a short distance away), they’d care how many feet their house is above 2,456 feet in elevation.
Rate Zone Numbers
On the FIRM map, rate zones A and V are almost always followed by a number, 1-30. You’ll see it expressed like A# (ie A10, A17). This number (#) indicates the number that you need to add to the BFE in order to determine the minimum elevation for building in that zone.
BFE + # = minimum elevation of structure
For instance, we have property that is in an AE-10 zone. Since we are coastal and our BFE is 0, any structure built in this AE-10 zone needs to be 0+10 feet above sea level. This requirement is applied to the LOWEST part of your house, so any basement or cellar needs to be at an elevation above 10 feet. (This explains why there are so few basements and cellars where we live.)
Summary So Far
So here’s where we are so far.
FEMA creates the FIRM which establishes your BFE and your rate zone for a given location. Then the NFIP steps in and depending on the actual elevation of the structure on your property (or the one you are renting in) and the rate zones, establishes your flood insurance premium.
Had enough of the alphabet soup yet? Sorry, there’s one more…
The CRS Can Help
While most of your flood insurance premium is determined by your elevation, the rate zone, and the BFE, the CRS can also help. CRS (Community Rating System) is “a voluntary incentive program that recognizes and encourages community floodplain management activities”.
Through different community actions (including things like flood education, and community design to encourage drainage), your community can get assigned a CRS score on a 1-10 scale. The lower your community’s number on that scale, the higher the discount that community members get on their flood insurance premiums.
Not all communities participate, but here’s a list of all those that do and what discounts are available for each of those communities. Unsurprisingly it looks like most communities in Florida participate with varying CRS discounts.
I realize this was exceedingly long and complicated for a blog post, but I basically just summarized a large chunk of this book in language that (I hope!) was easy enough to understand. Because only once you understand the system is it easier to figure out if you’ll be affected by the changes and get an idea of what your risks are.
Any questions so far? Who out there has flood insurance or is wondering if they should?