Higher Waters Open Gates to Higher Flood Insurance Premiums

When the waters rise, would you rather have a lifeboat or a life jacket?

The Federal Emergency Management Agency compares flood insurance to a lifeboat while disaster relief is like a life jacket, said Melody Daniel, a public information officer for the Arkansas Department of Emergency Management. Insurance provides longer-lasting, more-secure relief after a flood than the stopgap mechanism of disaster relief.

“I recommend anyone, whether they live in a flood plain or not in a flood plain, to look into getting flood insurance,” Daniel said.

For many Arkansans, as with most Americans, the path to flood insurance goes through FEMA’s National Flood Insurance Program. Participation in the NFIP is dropping, significantly in Arkansas, where residents have signed up for 17,951 policies at last official count, down from 21,345 two years ago.

Those policies paid off during last spring’s floods in Arkansas. In August, the NFIP said it had paid out $23 million on 494 claims from that disaster.

Between October 2015 and September 2016, the NFIP paid out more than $10.3 million on 466 claims in the state. After the April-May floods this year, disaster relief — which isn’t available until after an area is declared a disaster site — provided slightly less than $4 million in aid to 1,703 homeowners.

“One of the things we’re seeing nationwide, and in Arkansas, too, is policy count is way down,” said Mike Borengasser, the state coordinator for the NFIP. “That’s declining. It’s a lot. Many people have them because they are required for their mortgage, and I can’t imagine that has changed. People bought it as an option, and then when the prices went up, they dropped it.”

Borengasser says the decline in policies is probably tied to a rise in premiums in flood areas. Regulations were rewritten in 2012, and when premiums rose, Congress revised them again two years later in response to complaints.

“They reduced the premiums some, but they attached surcharges on top of it that, in some cases ... might have been the same difference,” Borengasser said.

Congressional Fix
On Tuesday, the U.S. House of Representatives passed a bill to reauthorize the NFIP for five years.

The bill, which passed by a 237-189 vote, is not expected to gain Senate approval. The NFIP is scheduled to end Dec. 8 after coming under intense financial strains due to recent hurricanes in Texas, Florida and the Caribbean. In October, Congress forgave $16 billion in debt owed by the program — which has a $30 billion debt limit — because of massive hurricane payouts.

Debate on the House bill was contentious. Financial Services Committee Chairman Jeb Hensarling, R-Texas, fought successfully to get the bill to allow private companies to provide flood insurance and restrict insurance availability on repeatedly flooded homes.

Critics said that private insurance wouldn’t bring lower prices through competition because they wouldn’t offer affordable policies in high-risk areas. Siphoning off lower-risk policies from the NFIP would just force those remaining in the program to pay even more.

Borengasser said he spoke with an insurance company official who had expressed interest in selling flood insurance policies in Arkansas. Borengasser said he asked how the company expected to make a profit in high-risk areas.

“He said, ‘Oh, we’re not going to write high-risk policies,’” Borengasser said. “What they’ll be doing is be selective on the low-risk policies. They won’t write any policies on structures that are below the base elevation. I guess they know right away it’s a higher risk and even with a higher premium they don’t want to mess with them.”

Few dispute that the NFIP needs reforms. Joel Scata of the Natural Resources Defense Council in Chicago said the greatest challenge is balancing risks and costs. “What we would like to see is a greater alignment between the risk that a property faces and the premium they must pay,” Scata said. “We recognize there are serious issues about affordability. [Poorer families] can’t afford to have flood insurance, but they can’t afford to be without it.”

Scata said research has shown that in some cases, houses built in high-risk flood zones have been flooded as many as five times, and the money those policies have paid out is greater than the value of the property.

Prevention as a Cure
He said any NFIP reform needs to have mechanisms for funding mapping and better transparency, steps that would better mitigate flood damage.

Proper mapping allows better planning for future developments and proper risk management, while transparency would make it easier for potential buyers of property to know its flood history.

“Flood insurance will only go so far,” Scata said. “Flood insurance doesn’t protect you from flooding; it just helps you rebuild after the fact. If you have a mitigation option, you can reduce your risk. If you reduce the risk, you reduce the premium.”

The federal government requires mortgaged properties in high-risk areas to have flood insurance. For banks issuing those mortgages, flood insurance is another way to protect their customers.

Debbie Gerdel, compliance officer with Signature Bank of Fayetteville, said many Signature customers were affected by flooding in Brinkley, where the bank has two branches. Gerdel said Signature Bank has recently amended its policy to research the flood risk of any property, whether it is an empty lot or an existing structure, in order to provide the most in-depth appraisal for their customers.

“It’s always a good thing when we can protect people because sometimes people don’t protect themselves,” Gerdel said. “From a banking perspective it is not too cumbersome. A lot of it is just educating customers. Previously it was just if you had a wall or roof structure on your property we needed to pull a flood certificate to make sure whether it was in a flood zone or not. The policy lets us educate our customers with all the building that is going on right now.”

Gerdel said the new policy helps potential buyers avoid buying property that will be a flood risk when they decide to build in the future. Not buying a flood-prone lot means not building a home or business on the same lot.

Borengasser is quick to point out that not all flood damage hits flood areas. Twenty percent of flood claims are in what are officially non-risky areas, and one-third of disaster relief money goes to property owners in those areas.

Borengasser said that shows the need for better mapping and research that a reformed NFIP could provide.

“That’s a point of contention: Are the flood maps mapping the true risk?” Borengasser said. “Maybe the risk is a lot worse than what the map is showing and that bears out in terms of claims. People think 1 percent [risk], ‘Wow, 99 percent won’t happen.’ I think the 1 percent may be a little low. It’s like flipping a coin several times; you might hit the same side three times in a row.

“Sometimes the upsets are phenomenal.”