Sweeping changes to the nation’s flood insurance program are expected to produce phased-in increases of more than 129% for around half of Louisiana policyholders, an analysis of FEMA data shows, while about one in 10 could see premiums jump by more than four times their current amount.
The rate increases would be phased in slowly over multiple years because program rules limit price hikes to 18% annually. Around a fifth of Louisiana policyholders deemed to have been paying too much are expected to see one-time decreases averaging about $960 under the ambitious remaking of the National Flood Insurance Program, known as Risk Rating 2.0.
These numbers were determined through an analysis by The Times-Picayune | The Advocate based off data released by FEMA, which oversees the program and began rolling it out for new policies on Oct. 1. Renewals must be calculated with the new model beginning April 1.
The figures are only projections and subject to change, but they provide the most complete look so far of the impact Louisiana could see under the new system. The flood insurance program is of vital importance here: Louisianans have by far the highest participation rate in the program of any state. The state also accounts for a disproportionate share of claims.
FEMA argues that it is misleading to blame the projected increases on the new system, since premiums also rise each year under the existing model. However, those increases average roughly 10% per year. FEMA also says that premiums never go down in the current model, and that the current prices do not accurately reflect risk.
The changes to the program are intended to make it fairer for all, partly by halting the practice of subsidizing newer, more expensive homes in flood-prone areas with artificially low rates. Risk Rating 2.0 also aims to bring the deeply indebted NFIP in line with sound actuarial practices by accurately determining the risk of every property and incorporating rebuilding costs in its calculations.
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There is widespread agreement that those goals are worthy. But in Louisiana, where the flood insurance program casts an especially long shadow, there are concerns that the changes could cripple real-estate markets in some areas and dissuade some homeowners from buying insurance in others.
Some of those concerns stem from the limited data available and the complexity of the new model being used to calculate premiums. FEMA has provided figures on premium increases for the first year only, which masks the overall impact. This is especially true in Louisiana because the state’s residents currently pay among the lowest premiums in the country.
Under federal rules, increases for existing policyholders are capped at 18% annually, but many Louisianans will see hikes compound at that rate for multiple years. According to FEMA’s estimates, even after five straight years of compounding 18% increases, roughly half of policyholders will not have reached their target rate yet.
Among those worried is U.S. Sen. Bill Cassidy, R-La., who fears many Louisianans will get priced out of the program. “There is a rationale and we’ve worked on this: How do you make it so that the middle-income family and the lower-income family gets a fair rate for their coverage?” Cassidy said.
“But whether or not FEMA’s approach is addressing this, I’m not clear. Again, they need to in plain English put out how they’re making their calculations, and they’ve not yet done that.”
He has called for a delay in Risk Rating 2.0’s implementation and co-sponsored bipartisan legislation that would lower the cap on annual increases. He would also like to see a clearer explanation of how residents can mitigate their premiums.
FEMA staunchly defends the new system, saying it will be more equitable, not to mention solvent.
“What we have now is a rating system that is both equitable and adaptable to climate change,” said David Maurstad, the NFIP’s senior executive. “A quarter of our full book of 5.1 million policyholders have been overpaying for a number of years.”
He added: “For people that want to characterize Risk Rating 2.0 as creating something new and alarming, they’re wrong because under the old way, rates would have continued to go up. Unfortunately, they were going up on the wrong people. They were going up on low-value homeowners and property owners.”
However, FEMA said it could not provide data on full projected premiums across Louisiana under the new system rather than just first-year increases, citing a variety of reasons, including that they are likely to change significantly over that time period. Over the next year or so, homeowners will find out individually on their renewal notices how long it will take them to reach their projected full premium amount, officials said.
‘It’s not vacation homes’
Chris Prejean says he missed it by a day.
He wanted to buy flood insurance for his newly built house in Houma, but by the time he tried, costs had skyrocketed due to the change that took effect Oct. 1, the same day he closed. He says the lowest quote he received was around $3,800 per year. He had been paying around $575 in his previous house.
Since he doesn’t live in a zone that requires it, Prejean opted not to buy flood coverage for the 2,500-square-foot house, but he wonders about the long-term effects of the changes, particularly for homeowners who have no choice.
There are also concerns that, for those not required to carry it, many will opt out, like Prejean. Cassidy and others have cited data predicting that nearly a fifth of policyholders nationwide could drop out.
Prejean says he knows of a couple living in Houma before Hurricane Ida who opted not to rebuild partly because the flood insurance would be too expensive. They decided to move to Covington.
“That’s kind of my fear. I grew up in downtown Houma, next door to where my dad grew up,” said Prejean, 39, a father of four who works for a homebuilder. “My roots run deep down here, and my concern is that they’re going to price everything out. You’re not even going to be able to afford it down here.”
One reason: Distance from water is one of a list of key factors in the new model. In south Louisiana, Prejean notes, just about everyone lives near water.
“You can throw a rock and hit water in Terrebonne,” said Prejean.
Determining the full, multi-year impact in store for Louisiana and its working coast, where shrimp boats and oil rigs far outnumber beachside mansions, is currently impossible. But some real estate agents and insurers have been shocked by the early results, saying they’ve seen sharp increases in premiums they don’t understand. They fear it could permanently reshape parts of the housing market.
Latter & Blum agent Tammy Whitehead provided documents showing a quote on a policy in the Beau Chene subdivision in Mandeville nearly quadrupling, to $2,250 per year.
Another Latter & Blum agent, Leslie Cambre, spoke of a $300,000 house in Luling where the premium rose to around $5,300 annually. She estimated it would’ve been less than $600 previously. Any prospective buyer will have to live with “more money going into insurance, less money going into equity.”
One house in Old Metairie jumped from around $500 to roughly $1,800, said Johnny Beckmann, senior vice president of Assured Partners, who added he has been struggling to follow the logic.
As for decreases, a house in the historically flood-prone Broadmoor section of New Orleans dropped from an eye-popping $8,400 per year to $1,700, said Lee Miller of Brightway Insurance.
Kim Callaway, director of legal and governmental affairs for the Louisiana Realtors association, said “our ultimate fear” is that increases will cause foreclosures, and then homes will be unsellable because the flood premiums are so high. Those hurt, she fears, will be regular folks, not the fat cats often featured in stories about the flood program’s ills.
“It’s not Florida, it’s not California, it’s not the East Coast. People living on the coast, it’s not vacation homes,” said Callaway. “It’s people who work at plants, it’s people who work for railroads. It’s fishermen, it’s shrimpers.”
Benjamin Albright, vice president for the Independent Insurance Agents and Brokers of Louisiana, said he understands the goal of making the program more equitable, but points to a “flaw in that argument.”
“For 60, 70 years, the federal government has been saying this is how flood insurance works, and people have bought homes and bought insurance, or not bought insurance, and got mortgages, and done everything else that they need to do based on how the federal government is selling flood insurance,” said Albright.
“Now, suddenly they’re changing how they’re doing flood insurance. And for some people, that is going to drastically change their ability to pay mortgages, to buy flood insurance.”
FEMA is asking Congress to provide assistance for those who can’t afford the new rates.
As a sign of the importance of the program to Louisiana, policyholders in the state have received $20.7 billion in settlements since the program’s inception – nearly a third of the $73.7 billion handed out nationwide, said Maurstad. But around 80% of those payouts are attributable to Katrina, a flood set in motion by a catastrophic federal engineering failure, as opposed to the usual risks.
A complex system
Unraveling how the new system works is complicated. Premiums will not be set using the old flood maps, but through a complex model using a range of factors specific to each property, including distance from water, foundation type and cost to rebuild. It also aims to account for more types of flooding, such as from heavy rainfall, and will look at height above base flood elevation for the property’s lowest floor.
The maps will continue to be used to determine who is required to buy insurance.
The new model was developed with the actuarial and consulting firm Milliman, which was paid nearly $11 million for the work, FEMA said in a letter in response to questions from U.S. Sen. John Kennedy, R-Louisiana.
FEMA has published data on what the new system will mean in terms of premium increases – but only for the first year, and only in aggregate. But a huge share of premiums will continue to rise year after year, and the lack of further information has frustrated the state’s congressional delegation, not to mention real-estate agents and insurers.
The average premium in Louisiana is currently around $745, lower than all but five states. FEMA’s data for the first year of the change says:
- 70% of Louisiana policyholders will see a yearly increase of up to $120
- 7% of policies will rise $120 to $240
- 3% will increase more than $240
- 20% will decrease at $960 for the year on average
The problem with providing only the first year is that it completely obscures the long-term effect. Decreases, on the other hand, will occur only in the first year.
Increases at 18% over multiple years compound into far larger numbers – the reason some brand-new policies have caused sticker shock. For instance, a policy that increases by 18% over a decade winds up jumping by 423% over that span. It should be noted that those buying a house with existing coverage can assume that policy rather than buying a new one.
FEMA has provided a rough outline of how long it could take for policies to reach their target rates. It estimates that around half of the roughly 500,000 Louisiana policyholders will take up to five years, 90% will arrive there in up to 10 years and one-tenth will take longer than a decade.
What that means is around half of Louisiana policyholders could see phased-in increases of at least 129%, while one-tenth of premiums could rise by at least 423%.
While the new rates are available for those buying new flood policies, FEMA says it cannot provide the target rates for existing policyholders. Agency officials say they are essentially a snapshot that will surely change based on factors including climate change, inflation or mitigation efforts by property owners.
Asked why estimates could not be released, subject to those caveats, to provide the public with a more complete picture, Maurstad said: “We’ve been as transparent as we can be.”
Cassie Masone, a vice president at Selective Insurance, a major writer of NFIP policies nationwide, explained some of the complexities in the new system.
Some variables will be provided by homeowners and insurance agents, while others will be matched from existing databases. A FEMA algorithm is eventually used to price the policy.
She said much remains unclear about how the new system will play out, particularly with renewals yet to begin.
“I think we have to let this play out a little bit so we can get our feet wet with the renewal process to see where things are going, and then we’ll see, when the rubber hits the road, what the true impact is and if FEMA has to make some changes,” she said. “But the reality is Risk Rating 2.0 is rating properties in an actuarially sound method, and that was the requirement that they had to do per Congress.”
-Staff writer Jeff Adelson contributed to this report.
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