The National Flood Insurance Program is not a private business; it was established under the Federal Emergency Management Agency when commercial insurers would no longer write flood policies.
But the government program wants to charge higher premiums to cover its potential losses, arguing that’s what private sector actuaries do.
We are not alone in wondering whether FEMA understands either its program’s mission, or the nature of flood risk.
Just ask Steve Scalise, the number 2 Republican in the US House. He called a meeting with the parish presidents of the New Orleans area to talk about the NFIP’s new “Risk Rating 2.0” program, which is likely to raise premiums drastically in South Louisiana.
While Scalise argued that the program showed a “lack of transparency” in the development of the new rate increases, he could point to specific problems the agency did not address. He said the agency has recognized that only a fraction of the nation’s shorelines are accounted for in its rate-setting algorithm, though that should lower the risk.
The goal of the new system is to assess the flood risk of each home rather than using the old method, which was based largely on FEMA’s flood maps. It wasn’t perfect, many argued, but at least it was clear enough for homeowners and businesses — and parish presidents — to understand.
Now a wide range of factors, including rebuilding costs, distance to water and elevation, are fed into a complex algorithm that calculates premiums.
FEMA defends its approach by saying it would be fairer for everyone, doing away with a system that resulted in older, modest homes essentially subsidizing premiums for newer, more expensive beach homes.
News flash to the NFIP: We don’t have thousands of beach palaces in Louisiana.
FEMA has released limited data on the increases, providing only first-year numbers under the new system. Rate increases have been limited by Congress, through the efforts of Louisiana’s delegation, including Scalise, to no more than 18% per year. This has the effect of masking the overall impact of Risk Rating 2.0. Annual increases will continue until homeowners reach a “target” rate under the new system, which in some cases increases dramatically over time.
The Times-Picayune | The advocate obtained FEMA’s projections of “full risk premiums” through a public records request. They show that Louisiana homeowners will eventually see an average of 122% increases under Risk Rating 2.0, phased in over several years.
As a coastal state, Louisiana’s interest in this program is not academic. Our residences and small businesses need insurance. The private market can secure giant facilities through special arrangements, such as a resort or a petrochemical plant on the Gulf Coast. But those options are not available – remember the history lesson of why the NFIP was created in the first place – to insure the large number of residents in coastal Louisiana.
And, again, we don’t have many beaches worth mentioning here.
Already, there are signs that the new premiums are taking a toll: Jefferson Parish President Cynthia Lee Sheng said she was told Monday that about 3,000 homeowners in her parish have dropped their flood insurance since renewals began going out in April.
If that trend continues, the NFIP may lower its actuarial exposure, but it will lose premiums. And homeowners may be exposed to catastrophic consequences.
Just the situation the program was created to avoid.