Wave of flood insurance changes headed our way

By on March 17, 2013

Flood collageRates for flood insurance are going up for many local residential and commercial property owners.

This comes on the heels of the 17-percent rate increase allowed by the state insurance commissioner on basic homeowners policies in many areas of Dare and Currituck counties.

Add to those the 5-percent surcharge on wind and hail coverage for owners participating in the so-called Beach Plan run by the state of North Carolina.

John DeBoy of the Outer Banks Homebuilders Association and Willo Kelly, government affairs officer for the homebuilders and the Outer Banks Board of Realtors, believe property owners need to be aware of these potentially expensive changes.

We sat down with them recently to discuss the changes and help owners navigate the alphabet-soup of acronyms surrounding insurance.

Kelly, perhaps the most knowledgeable person in Dare County on property insurance issues, began with a little history of the federally administered National Flood Insurance Program (NFIP).

Congress authorized the program in its current form in 1974. Private sector insurers were shying away from issuing policies in areas prone to flooding, which congressional leaders felt was retarding economic growth in those regions.

“Market rates” were to be set so that premiums paid into the program would cover damage claims.

The government mapped the entire country and rated flood risks through Federal Insurance Rate Maps (FIRM).

They established broad zones of “V,” subject to wave velocity damage; “A,” subject to a 1 percent annual chance of a flood event over a 100-year period; and eventually “X,” where flood events were spread over a 500-year period.

Subzones within each category further broke down flood risk.

According to DeBoy, 52 percent of the American population lives close to oceans, estuaries, rivers, creeks and even flood-prone valleys.

While mortgage lenders almost always require borrowers to buy flood insurance if the property is in a Special Flood Hazard Area (SFHA), properties without such loans are generally not covered.

It was estimated that as many as 70 percent of the properties in New York damaged by Hurricane Sandy lacked flood insurance. In many cases, those properties were not located in areas previously designated as SFHA’s.

To get the program started, Congress needed local communities to agree to participate and owners with existing properties to join. As a result, all structures built prior to the 1974 flood maps were offered steep discounts of 40 to 60 percent of their actual risk-rated premiums.

Those discounts, which the government refers to as “subsidies,” were grandfathered in such a way that the reduced premiums stayed in effect even when ownership changed hands.

Flooding in Kitty Hawk just south of the Hilton Garden Inn after Hurricane Sandy in October of 2012. (NCDOT)

Flooding in Kitty Hawk just south of the Hilton Garden Inn after Hurricane Sandy in 2012. (NCDOT)

Then, in 2005, claims from Hurricane Katrina exceeded the program’s ability to pay out, forcing the fund to borrow from the U.S. Treasury.

Congress debated a series of proposed reforms, including eliminating the program altogether. In 2012 the Biggert-Waters Flood Insurance Reform Act was passed and significant reforms were announced.

This year, rate increases are in store as the Act eliminates discounted premiums for those pre-FIRM properties.

On Jan. 1 of this year, so-called second homes, which include investment properties, built prior to 1974 will see rates rise about 25 percent a year until actuarial risk rates are achieved, including:

• Any residential property that is not the primary residence of an individual

• Any severe repetitive loss property

• Any property that has incurred flood-related damages that cumulatively exceed the fair market value of the property

• Any business property

• Any property that after the date of the Bill has incurred substantial damage or has experienced “substantial improvement exceeding 30 percent of the fair market value of the property

• Any new policy or lapsed policy, or any policy for a newly purchased property

• Any policy for which the owner has refused a FEMA mitigation offer under HMGP, or for a repetitive loss property or severe repetitive loss property.

Severe Repetitive Loss means four or more claims payments of over $5,000 or two
claims that exceed the value of the property.

If you don’t own a pre-FIRM property, don’t pop those champagne corks just yet.

In addition to the pre-FIRM phase-out, Kelly said, Congress has allocated FEMA, which administers the NFIP, $400 million to remap the entire country to create new maps for the FIRM ratings.

Using historical flood data since 1974 and far more accurate four-layer digital mapping techniques, existing pre- and post-FIRM properties may see their rates increase, sometimes substantially.

Three confusing factors will come into play when the new maps are released.

The first issue is “Base Flood Elevation” or BFE.

If you are in a flood zone, the flood insurance program would base your rates on how high your first-floor enclosed area was above the predicted base flood area.

For example, if the predicted base flood plain was 3 feet above sea level, homes built at 3 feet above BFE received standard rate. If your home was above BFE, discounts kicked in for each additional foot, and if your home was below BFE, your premiums were much higher.

With the new mapping, it is expected that the BFEs will change, for the worse in most cases, in many SFHAs.

Thus, without any changes to your property’s foundation elevation, you might see a rate increase. More accurate mapping might also indicate your original BFE was slightly off, and if a new BFE survey reveals that error — as can happen when you sell a property — rates could also change.

Kelly and DeBoy noted that many property owners, to gain maximum height, built structures right at the BFE in effect at the time of construction.

In the past, if your BFE changed over time, the property was grandfathered with premiums based on the BFE at the time of construction.

No more. Any change in BFE will result in a change in premiums each time FIRM maps are updated.

In addition, the new maps are also expected to change the current boundaries of the “A”, “V” and “X” zones.

This means properties currently in an “A” zone could be remapped into the more expensive “V” zone, while some “X” zone properties may now be located in “A” zones.

Finally, a new “Coastal A” zone has been proposed.

According to Karen Bachman at G.R. Little, insurance companies have been told the new zone will define a Limit of Moderate Wave Action (LiMWA) where the wave is between 1.5 and 3 feet.

Kelly says these zones will likely “drop in” behind current V-zones, which will affect properties between the highways along the oceanfront and could also include sound side properties where 1½ -foot wave action has been observed in past storms.

DeBoy brought along the new building code book for the proposed new zone, a tome thicker than the entire building code requirements of most towns.

Thus, in addition to higher flood premiums, construction costs in the new zone will be higher.

Kelly also sees a potential conflict in new construction if BFEs rise under the new maps.

It will be difficult for new homes forced by the BFE to be elevated higher on pilings to conform to many local height-restrictions.

North Carolina Sea Grant provided some examples in a press release dated December 14, 2012 of rate increases in pre-FIRM zones when combined with hypothetical changes in BFE.

BFE increases in an “A” zone by one foot would raise premiums on a $100,000 structure with $40,000 content coverage from $1,458 per year to $3,844.

In a V-zone, which is usually oceanfront/oceanfront proximate, the same 1-foot change would raise premiums from $3,478 to $4,670 annually. If the new maps raise BFE by 3 feet, the new premium could rise to over $10,000 depending on the coverage chosen by the owner.

Uncertainty pervades this subject.

No one knows when the new flood maps will be released, so changes in BFE, the boundaries of current flood zones and the new boundaries of the Coastal A zone are unknown for current owners and potential buyers.

Sea Grant also noted that in the past, the NFIP was restricted to rate increases of 10 percent a year. Now that figure has been increased to 20 percent if NFIP decides to increase rates across the board.

Also, rates were set on storm data reflecting current conditions. However, the Reform Act set up a special committee with a one-year mandate to explore other possibilities in the future, such as predicted sea-level rise or development patterns that could increase storm-water runoff in premium calculation.

Sea Grant notes this could significantly raise BFEs and may drastically affect riverine communities.

For now, Kelly and DeBoy suggest property owners currently covered by flood insurance stay in touch with their insurance agents.

Kelly also suggests owners in flood zones might want to obtain new BFEs from surveyors as a possible tool to use in seeking localized exceptions to the generally broad boundaries included in FIRMs.

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March 25, 2013 9:41 pm

We have lots of educated insurance professionals on the outer banks! Willo Kelly does not fall within that group! The petition that she has circulating requesting a hearing on the increase in the Beach Plan is not prepared correctly because it cannot be verified!

s mulligan

March 24, 2013 7:23 am

capitalism at it’s finest!

Russ Lay

March 20, 2013 4:57 pm

Millenial-I agree. But since I’ve worked for/with politician much of my life, I think I owe it to our readers to explain what really goes on behind the scenes. And you are 100% correct. In states with vulnerable coastal areas, the upside is those areas drive an economic machine that benefits the entire state and the local communities.


March 20, 2013 4:38 pm

I believe the Congressional Record can be found here:


Mostly I read a bunch of municipalities complaining that the 100 year floodplains were unrealistic. I wonder if they’d say the same thing now . . .

Sec. 2(a)(4) of the Act is pretty straightforward:

“Federal instrumentalities insure or otherwise provide financial protection to banking and credit institutions whose assets include a substantial number of mortgage loans and other indebtedness secured by property exposed to loss and damage from floods and mudslides;”

So the Feds were looking for some cash to CTA, and the muncipalities didn’t like it.

Russ Lay

March 20, 2013 4:00 pm

Obxwahoo-I doubt we’d ever know. As Robin pointed out, NFIP was created for one reason and it mostly dealt with the Mississippi River valley. Why Congress decided to identify all communities in flood zones and tie insurance to federal mortgage loans (which almost all mortgage loans are these days) and later, the FDIC extended the mandate to all improved real estate loans is a different question. In 1968 you could count the number of participating communities on two, maybe three hands. By the 1974 “reform”, over 13,,000 communities jumped in. The problem now is as libertarian as scaling back sounds, communities and economies were built under a set of rules that did not discourage development and now that spigot is being turned off, with little time for local communities to adapt to the changes.


March 20, 2013 10:34 am

I wonder… was the flood insurance program created to protect people… or was it created at the big banks behest to protect their mortgage loans?

Seems we are just stuck in the middle of banks and insurance companies, and now they are putting on the squeeze. Unlike other consumer products, you can’t just drop your insurance when the rate goes up – your bank will be more than happy to “force coverage”.

KDH Rezident Evil

March 19, 2013 11:59 pm

This place should be nice and quiet in a couple of years when nobody can afford to live here anymore.

Some info on the insurance companies that do business here:

STATE FARM boosted profits by a billion dollars last year, even as it continues to recover from the hit it took during the financial crisis, when fewer people could afford auto and homeowners policies. Still, the company has a whopping 81 million policies. #37 on the Fortune 500.

USAA: The San Antonio-based insurer and financial services company earned $1.5 billion in the first six months of this year, up 78 percent from $841 million in net income for the same period last year. #144 on the Fortune 500.

Allstate: Allstate Corp. (ALL), the largest publicly traded U.S. home and auto insurer, said third-quarter profit quadrupled on reduced disaster claims in the period before Hurricane Sandy lashed the East Coast.
Net income rose to $723 million, or $1.48 a share, from $175 million, or 34 cents, a year earlier. (#93 on Fortune 500)

Metlife: MetLife’s purchase of American Life Insurance Company (ALICO) from AIG in November 2010 has given it a global edge, particularly in Japan. The company’s real estate investments department, which created more than $11 billion in commercial mortgage loans in 2011, had its best production year ever. Revenue increased 34% over 2010, and MetLife inched 12 spots up the Fortune 500 ladder. (#34 on the Fortune 500).

Nationwide (#100 on the Fortune 500) was the only one I could find that had losses last year. But they’re still #100 in the Fortune 500.

I hope these fat cats are enjoying their goose liver pate, caviar and champagne orgies on my dollar.

imported obxr

March 19, 2013 6:02 pm

Having bought property here 6 years ago, and moved here permanently in August of 2012, it is as though property values have declined drastically, based on the latest assessment, and additional costs have increased just as drastically. I understand the concept of the ” welcome to Coastal Living”, but this is outrageous. I only wonder what is next?

Russ Lay

March 19, 2013 11:36 am

Robin: Not to belabor a minor point, but I still disagree. A seminal study in 1942 that I used when working for Rep. G. William Whitehurst in 1980 said this: Gilbert White finishes Human Adjustment to Floods: A Geographic Approach to the Flood Problem in the United States. He advocates, “adjusting human occupancy to the floodplain, and at the same time, of applying feasible and practicable measures for minimizing the detrimental impacts of floods.” He characterizes the pre­vailing national policy as “essentially one of protecting the occupants of floodplains against floods, of aiding them when they suffer flood losses, and of encouraging more intensive use of floodplains.”

The extensive use of the floodplains was important. The TVA chimed in during the 50′s in a report to Congress: An internal report from the TVA, Major Flood Problems in the Tennessee River
Basin, notes that many communities have flood problems but because of insufficient development in flood-prone areas, flood-control projects cannot be justified. Gordon Clapp, Chairman of the TVA’s Board, responds, “What should TVA do, wait for development of the floodplains so that a flood control project could be justi­fied?”

President Truman in 1951: ““The lack of a national system of flood disaster insurance is now a major gap in the means by which a man can make his home, his farm, or his business secure against events beyond his control.”

Detractors continued to hope a national program would discourage development, but as the economies of local communities began to grow from port commerce (New Orleans) and tourism, local congressmen saw the program as a means to subsidize development of their district’s development in unwise areas to build, which is what happened. Once the program was established, all communities benefitting from the program repeatedly cited its withdrawal as something that would stymie their communities. The “window dressing” of flood insurance as part of a local planning tool to discourage development in “dangerous” areas was subsumed to the “subsidy” angle, which allowed such subsidies to remain and created the Virginia Beach and Myrtle Beach situations you see today!


March 19, 2013 11:29 am

@ Robin & Russ: your disagreement on the “why” of congress’ establishment of the NFIP, be it as a safety net or to abate the retarding of economic growth, seems to arrive at the same conclusion: to help folks vulnerable to flooding still drive the economic machine.

Let’s not get a good discussion hung up on a relatively inconsequential detail, as government often establishes programs & directives to drive growth AND provide safety nets where private enterprise won’t.

Robbin Banxs

March 19, 2013 9:26 am

Russ – I’ll accept your reasoning re: timing of the establishment of the NFIP. There have been so many legislative actions that regarding the NFIP that it’s s difficult to pick one that clearly defines the Program’s origin.

As for why the NFIP was created, you are correct that private insurers were not extending coverage for floods. But Congress DID NOT establish the NFIP because they thought this lack of private flood insurance was “retarding economic growth.” Congress created the NFIP (primarily due to the impacts of Hurricane Betsy in 1965) as a safety net, to help Americans who were vulnerable to flooding and couldn’t get insurance coverage.

According to the US Congressional Research Service, the primary policy objectives of the NFIP were to:

(1) identify and map the nation’s regulated floodplains to make the public aware of flood hazards;
(2) address the escalating cost of federal disaster assistance for flood damaged buildings and their contents;
(3) allow property owners within communities that adopted and enforced a Federal Emergency Management Agency (FEMA) approved floodplain management ordinance to purchase insurance as a protection against flood losses; and
(4) guide development and building practices to save lives and reduce future property damage.

While federally-subsidized flood insurance may have had an impact on economic growth (for better or worse) that clearly was not one of the Program’s primary intents.


March 19, 2013 8:02 am

ekim….the price you pay for living in a SFHA.


March 18, 2013 7:58 pm

The 3 home owners @ the end of my street said FORGET IT THEY’RE MOVING I think alot of people will do the same its not worth it!

Russ Lay

March 18, 2013 6:50 pm

Wahoo-statewide I think it was around 7%. But for OBX residents not on the mainland, it was 17%. http://outerbanksvoice.com/2013/03/05/homeowners-insurance-on-obx-to-increase-17-percent/#more-94663

Russ Lay

March 18, 2013 6:48 pm

Robin: You are technically right. but the program did not take on its actuarial rate structure and so-called partnership with private insurers until the FIRM maps were created starting in 1974. From 1968 to 1974 the pool of insurers was small and only a few FIRM maps were available. The program was aimed at the Mississippi River basin, although Alexandria, VA joined. Only a small handful of communities joined.Communities self-identified, self-applied, and provided whatever data they could if no FIRM maps were available.

Congress ordered all flood plains be identified after Camille. By the end of 1974, the number of communities identified jumped from a handful to over 13,000 and insurance was required for any federal backed mortgage-Fannie, Freddie, VA, FHA.

As to the rationale, I respectfully disagree. The reason the government pre-NFIP was doling out disaster relief funds was that private insurers were not offering coverage.

A Nov 28 NY Times editorial states:”The flood insurance program was created by Congress in 1968 to fill a void: because of the risk, few carriers provided flood insurance. Now, private insurers offer flood insurance in a partnership with the government — but taxpayers shoulder all the risk.”

It was the 1974 system that set up the current system that has taxpayers on the hook.


March 18, 2013 12:22 pm

Are you sure that 17% figure is correct Russ? I thought they’d bargained it down to avoid a hearing to something around 9%.

Robbin Banxs

March 18, 2013 12:05 pm

Ms. Kelly is wrong about the origin and intent of the NFIP.

The U.S. Congress established the NFIP on August 1, 1968, with the passage of the National Flood Insurance Act (NFIA) of 1968. The NFIP was broadened and modified with the passage of the Flood Disaster Protection Act of 1973 (and other legislative measures) and was further modified by the National Flood Insurance Reform Act (NFIRA) of 1994 and the Flood Insurance Reform Act (FIRA) of 2004.

Also, the NFIP was NOT created because congressional leaders felt the lack of private flood insurance was retarding economic growth. The NFIP was created in light of mounting flood losses and escalating costs of disaster relief to taxpayers. The intent of the NFIP was to reduce future flood damage through community floodplain management ordinances, and
provide protection for property owners against potential losses through an
insurance mechanism that requires a premium to be paid for that protection.


March 18, 2013 11:09 am

Russ would like to read this in detail. how to make a copy,pdf for my print. at a loss computer wise to do this. thanks


March 18, 2013 8:58 am

I though the Republicans of NC told mother nature she could only raise the seas to conform to current and future development needs?

Salvo Jimmy

March 18, 2013 7:00 am

My homeowner policy does not include wind / hail (covered by Beach Plan) or flood (covered by NFIP)

I find it unbelievable that my risk for everything except wind / hail and flood is 17% more than inland areas with a 2-3% increase.

Smells like 10 day old bunker to me.

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