As mandated by law, flood insurance rates increase April 1. Commercial real estate owners with property in Special Flood Hazard Areas (SFHA) will be hardest hit by a 25 percent annual premium increase until they reach full-risk rate, plus an annual $250 policy surcharge. Bannon Engineering puts together a good synopsis of the 2015 NFIP (National Flood Insurance Program) changes and events leading up to them. Here are a few highlights:
The Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), tried to limit or eliminate subsidies so that premiums were at full risk rates. A full risk rating means that the premium is based on the elevation of the lowest floor compared to the Base Flood Elevation. Approximately 20 percent of NFIP policies are subsidized for pre-FIRM (Flood Insurance Rate Map) structures. …New requirements under BW-12 activated the full actuarial premium rate upon sale. The rate increase resulted in opposition from affected property owners, realtors, and politicians. As response to the outcry, the Homeowner Flood Insurance Affordability Act of was passed by Congress. The Homeowner Flood Insurance Affordability Act amended and delayed some of the changes made under the BW-12 but did not repeal it. On April 1, 2015, Homeowner Flood Insurance Affordability Act provisions go live with:
- Flood insurance annual rate increases for primary, owner-occupied residences built before 1978 (i.e., pre-FIRM structures) will increase by not more than 18 percent, plus fees.
- Pre-FIRM vacation, rental, and business properties will continue to go up by 25 percent per year until they reach the full-risk rate, the same increase mandated under BW-12.
- Pre-FIRM structures substantially damaged or improved – that is, reconstructed at a cost that equals or exceeds 50 percent of the structure’s market value before the improvement – will have an annual rate increase of 25 percent. (This represents a change from BW-12 that reclassified all substantially damaged buildings as post-FIRM and immediately required full-risk rates.)
- Starting April 1, 2015, an annual surcharge is added to all flood insurance policies: $25 to primary residential structures and $250 to non-primary residential and non-residential structures.
- A new option for a deductible up to $10,000 for single family and two-to-four family dwellings to help make some policies more affordable. If this higher deductible is used, it must apply to both the building and the building contents. According FEMA, choosing the maximum deductible can result in up to a 40 percent discount from the base premium, but there is no guarantee that mortgage companies and other lenders will accept this higher deductible.
- Allows temporary “grandfathered rates” for eligible property owners of structures built in compliance with a prior flood rate map after a new one is published. Under the grandfathering provision, the first year premium, full-risk rates are to be phased in by a maximum cap of 18 percent per year.
Read the entire summary at bannonengineering.com.
Consult your insurance agent or broker for more information on how the changes affect your flood insurance premium.
The rate hikes are but one of many changes to the NFIP, which is drowning in debt and, according to a recent Government Accountability Office (GAO) report, hampered by a number of challenges that FEMA faces in implementing the new requirements, including resource issues, the complexity of the legislation, and the need to balance the National Flood Insurance Program’s financial solvency and affordability goals [Source: GAO Report #GAO-15-178: Flood Insurance Status of FEMA’s Implementation of the Biggert-Waters Act, as Amended].
The legislative changes to the NFIP underscore the importance of accuracy in flood risk. The NFIP has never been able to evaluate individual characteristics to determine a property’s true exposure to flooding, but you can. Knowing a property’s true exposure may reveal that a structure(s) sits at an adequately high elevation and has been erroneously designated as high-risk, leading to unwarranted flood insurance expenditures and decreased real estate value. Conversely, knowing a property’s true exposure may reveal that a structure(s) is susceptible to flooding, requires mitigation activities and increased insurance coverage. Now would be a good time to verify the accuracy of your high-risk flood insurance requirement to protect the value of real estate holding and to manage the bottom line.
Commercial property owners subject to flood insurance requirements must be diligent about their risk and it begins with a thorough flood risk evaluation.