Flood Insurance Crisis: If the High Water Doesn’t Get You, the High Premiums Might

NEW YORK (MainStreet) — When the levee broke, a river of muddy water flooded the little town of Valmeyer, Ill., for nearly two months. The small community of some 2,500 residents was "erased" by the overflowing water from the Mississippi River during the Great Flood of 1993. With help from the U.S. government, the village was rebuilt on nearby bluffs "where it thrives today," says Nicholas Pinter, professor of geology at Southern Illinois University.

If other solutions aren’t implemented, many floodplain residents in America may face similarly forced migrations.

The National Flood Insurance Program is some $24 billion in the hole. Many homeowners in flood zones are beginning to feel that fiscal pain as flood insurance premiums skyrocket. Rate increases of 18% to 25% for some policyholders have gone into effect as of April 1, with additional surcharges up to $250.

Climate change and subsidies, or FEMA mismanagement?

Blame it on climate change and decades of premiums lagging risk, professor Pinter says, but the "government handout" of flood insurance subsidies will have to end — with homeowners absorbing a "doubling or tripling, or in some cases much more," increase in premiums — or else floodplain residents should consider moving to higher ground.

George Kasimos, a real estate agent in Toms River, N.J., knows a thing or two about flood insurance. His home was damaged by Superstorm Sandy, but his claim was paid, and he rebuilt. Kasimos says the $24 billion flood insurance shortfall is due to the bureaucracy and "mismanagement" of the Federal Emergency Management Agency.

"Only 44% of our premiums actually go toward paying of our claims," he says. Kasimos contends that out-of-control expenses – and litigation defense – are contributing to the insurance program debt.

Meanwhile, Pinter contends the national insurance program has been "overgenerous from the start" — keeping premiums artificially low as the result of government funding. Reforms implemented in 2012 by Congress aim to end the subsidies and require homeowners in high-risk zones to absorb premium increases until they pay the actuarial rate for flood coverage.

Floodplain residents could own homes with ‘zero value’

The measures were "admirable" in intent, Pinter says, but with the result of hitting insurance holders so hard that "some floodplain homeowners would literally lose all value in their home. You drive up mandatory insurance [rates] enough, and a home can literally have zero value."

Kasimos knows the numbers by heart: "Currently, my actuary rate is about $7,000. [With subsidies] I'm currently paying $1,000 a year." And Kasimos says his rate is scheduled to increase by 25% each year, with an added $250 annual surcharge, until his premium matches that $7,000 actuary rate.

"A 30-year fixed mortgage at 4.5% is about $5,000 a year. So for every $5,000 a year that your flood insurance rises, your property loses $100,000 in value," he adds.

Congress – and homeowners – must share the burden

Pinter believes if Congress "owns up" to the problem and provides continued flood insurance funding, homeowners should have to share the burden.

"They should be given a one-time opportunity to take the solution into their own hands and move someplace safe. If they choose not to, then they shouldn't be insured, or they should face the actuarial rates. There has to be responsibility on both sides," Pinter says.

Kasimos, who launched StopFemaNow, a grassroots effort dedicated to “keeping flood insurance affordable,” says some members of the organization face actuary insurance rates of $65,000 annually. The maximum coverage offered by flood insurance is $250,000. He wants to see “inaccurate and incomplete” flood zone maps revised, to better measure “true risk,” with actuarial rates that reflect that risk. And Kasimos believes private insurers could step in and run the program more efficiently.

Find out your true premium rate

Typical homeowners insurance policies don’t cover flood damage. If you live in a high-risk area and have a flood insurance policy, Kasimos advises you to learn what your true premium rate is, without subsidies.

"Call you flood insurance agent and ask them what your actuary rate is," Kasimos says. "That's what your flood insurance premium will end up being."

With “30 million people” living in flood zones, Kasimos asks, what's going to happen to those communities when properties are abandoned because owners can't afford flood insurance — and see the value of their home plummet? He claims people are already having difficulty selling their homes “because of the stigma” of living in a flood-prone area.

"People are shying away from homes on the waterfront, or in a flood zone," Kasimos says. The flood insurance issue could result in a "housing crisis that's going to make the 2007 housing bubble look like a walk in the park," he adds.

It’s time to make hard decisions

Pinter believes the issue must be faced by all Americans – including taxpayers living outside of flood risk areas.

"We as a society have to make certain decisions — about whether we're just going to let the accountants throw those people into icy floodwaters, or whether we're going to absorb some of that cost, which we historically have," Pinter says.

Pinter does offer one other solution: mitigation.

"We can make hard decisions — and invest in those decisions — to get people out of harm's way,” he says, citing Valmeyer as an example. "And there's a dozen other such communities around the country that have been moved wholesale. That's a tough decision, and in almost all cases it has taken a level of governmental investment, but it's a permanent solution to flood hazard."

Of course, moving New Orleans or Staten Island are not options. But Pinter says you can move some cities while protecting others. He notes thousands of properties in Illinois alone have been bought out. Rather than moving entire communities at once, residents are moved one-by-one out of flood plains — "when they get wet.”

Still the challenges multiply

Inexplicably, new construction in high-risk flood areas continues. Perhaps the most notable example is near Sacramento, Calif., in the suburb of Natomas. Pinter says half-million to million-dollar homes are being built on land that is "below the Sacramento River level on the driest day of the driest year." Developers and residents there choose to believe the 48-mile levee surrounding the community is infallible, he says.

"But every year, there are levees that break, all over the country,” Pinter warns. “In 1993, over 1,200 levees on the Mississippi and Missouri system broke."

And yet, because the levees encircling Natomas are being fortified, earlier this month FEMA lifted a moratorium on new development in the area – reversing a building restriction that has been in place since 2008.

Beginning in June, aggressive commercial and residential development can begin again, in what the U.S. Army Corps of Engineers has said is "probably the most at-risk area in the nation for catastrophic flooding."

— Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick

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