The High Costs of Extension and Reform of the National Flood Insurance Program

On July 6, 2012, President Obama signed the Biggert-Waters Flood Insurance Reform Act of 2012 (“Act”) into law[1].  The Act embodies the much-anticipated extension and reform of the National Flood Insurance Program of 1968 (“NFIP”).

The Act extends the NFIP from August 1, 2012 to September 30, 2017 and provides much-needed certainty to more than 5.6 million home and business owners who rely on the NFIP for flood insurance.  By way of illustration, in the State of Florida alone there are more than 2 million flood insurance policies currently in force.

Unfortunately, the Act did not come without a steep price tag for consumers.  Home and business owners relying on the NFIP for flood insurance should expect to see the following changes as a result of the Act:

  • The limitation on annual increases to the risk premium rate has been raised from 10% to 20%.  This adjustment is expected to occur over the next five years, except for second and vacation homes previously receiving a subsidy (which are discussed below).
  • The NFIP subsidies for second and vacation homes will be discontinued altogether.  Thus, premium rates for second and vacation homes will be increased to the full actuarial rate; that is, the rate that reflects the true risk of a loss to such properties.  This adjustment is expected to occur over the next four years, and the Act raises the limitation on increases to the risk premium rate for second and vacation homes to 25% annually.
  • Catastrophic flood years will be included when assessing flood risks, in order to set annual risk premium rates.
  • Discounted or “subsidy” rates for new and lapsed policies will be discontinued.

As a result of the Act, Florida residents in coastal or flood prone areas should expect to experience significantly increased flood insurance costs over the next five years.  Because a substantial share of Florida’s real estate market consists of property intended for use as second homes or vacation homes, the elimination of subsidies for such properties under the Act will raise their costs of purchase and maintenance for years to come, possibly even reducing market demand and price.

Thus, for our clients who are considering the purchase of commercial or residential property located in a flood-prone area, the risk of significant increased costs for flood insurance in future years should be added to the investment decision.


[1] For the full text of the Act, see H.R. 4348:  Division F – Title II