More than 13,000 Hawaii property owners — including businesses, owners of vacation homes, and those whose properties have had major problems with flooding could see their annual federal flood insurance premiums climb by 25 percent before the end of the year.
Thousands of other property owners may also face huge increases, according to a Federal Emergency Management Agency spokeswoman.
Nationally, the rate hikes are sparking concern. The increases were passed by Congress last year to prop up a federal flood insurance program that’s billions of dollars in debt and that makes big payouts every time a major storm hits.
But as more have been hit with sticker shock, complaints have grown louder, particularly in flood-prone areas like Louisiana where the increases will reportedly balloon some insurance bills to as high as $28,000.
The ramifications are frightening,” The Times-Picayune in New Orleans opined in an editorial LAST week.
Members of Congress are in full retreat. Just a year after approving the increase, the U.S. House of Representatives, with the support of Hawaii Reps. Colleen Hanabusa and Tulsi Gabbard, added an amendment to the Homeland Security appropriations bill last month that would delay the premium hikes for a year. A proposal in the Senate would delay it for three years. Both chambers would have to agree on an approach to stop the increases. With Congress unable to agree on much these days, it's by no means certain that a delay will be approved before the increases kick in on Oct. 1.
"I don't think most people (in Hawaii) know about it yet," said Dale Border, president of the Hawaii Association of Realtors. She urged homeowners in flood areas to contact their insurance agent to find out what the effect might be on them.
The underlying question seems to be whether owners of properties at the most risk of flooding should be required to pay more. Critics of a delay say it would mean continuing a system that passes the costs of owning expensive waterfront properties on to other property owners.
"There's no such thing as inexpensive beachfront property," said Chip Fletcher, associate dean at the University of Hawaii’s School of Ocean and Earth Science and Technology
Supporters of a delay talk about enormous premium increases that unfairly affect other homeowners, said Steve Ellis, vice president of Taxpayers for Common Sense, a watchdog group that has pushed for reforming the flood insurance program. “But they fail to talk about millionaires, even billionaires, that will stand to benefit.”
A delay would also encourage people to build in flood-prone areas and then expect help when properties do indeed flood. Already, critics say, not charging property owners for the true cost of insuring flood-prone properties has cost the nation's taxpayers tens of billions of dollars.
Long-standing Issue
The question of how to protect people living in flood areas from financial calamity has been around for a long time. It has only gotten more attention as major storms like Hurricane Katrina and Superstorm Sandy have brought epic rain and wind, not to mention a mammoth price tag.
Increasingly frequent and severe storms have overwhelmed the National Flood Insurance Program, created by Congress in 1968 to offer subsidized flood insurance because basic homeowners’ insurance policies did not cover floods.
Since its inception, the program has included a number of subsidies. At issue in the current debate are people who built their businesses and homes according to code. But upon the drawing up or amendment of flood maps, they found themselves in inundation zones. To protect them from severe insurance hikes, Congress grandfathered in those people, allowing them to pay premiums that do not take into account their flood risk.
According to a recent General Accounting Office report, the grandfathered rates are about 40 to 45 percent lower than those for newer unsubsidized properties.
Those days are now due to end. That is because the money paid into the insurance program does not cover the amounts paid out after natural disasters strike, according to the July 3 GAO report. The program takes in about $3.5 billion in premiums every year, according to Taxpayers for Common Sense. The program has had to borrow money from the U.S. Treasury when major storms hit. In January, for instance, Congress authorized the cash-strapped program to borrow another $9.7 billion from the Treasury to pay for claims related to Superstorm Sandy.
The program’s debt to the Treasury has grown to $24 billion and it hasn’t repaid any principal on its loans since 2010, according to the GAO report. Even with the rate increase, premiums “likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Treasury to cover claims from the 2005 hurricanes or future catastrophic losses,” the report said.
That debt represents billions of dollars that could be used for other purposes, particularly at a time when Congress is imposing sequestration cuts and contemplating cut backs to Medicaid and other programs. The money owed to the Treasury, “just adds to the nation’s debt,” said Ellis, of Taxpayers for Common Sense.
“Furthermore, by not pricing insurance properly we’re inducing more development in high risk areas, which in turns generates more claims against the program when the inevitable disaster strikes,” he said.
To make the system more sustainable, Congress last year passed the Biggert-Waters Flood Insurance Reform Act, in which many property owners with grandfathered rates, as well as others who've had their insurance kept artificially low, will see their rates increase every year until it is in sync with the actual flooding risk. What that level is depends on a number of factors, including whether the home or business is on stilts.
The first increases began in January, when people whose second homes had qualified for the lower rates saw a 25 percent premium increase.
On Oct. 1, the 25 percent increase is scheduled to hit businesses with grandfathered rates. Other properties, regardless of when they were built, will also endure that increase if they have had repeated or expensive flood claims.
In Hawaii, FEMA said 13,850 properties are expected to have their premiums affected by the change, with most seeing an increase though some may see a decrease. That’s roughly a quarter of the 58,906 flood policies in the state. Because the rates will be based on flooding risk, the hardest hit would be property owners in Special Flood Hazard Areas, said FEMA spokeswoman Olivia Humilde.
FEMA declined to release the names and amounts of Hawaii property owners who would benefit most from delaying the rate increase.
On top of the immediate increases, the coming years may bring additional hikes. Owners of primary residences who’ve had their rates grandfathered in will not immediately see an increase, Humilde said, but as of Oct. 1, if their homes are sold, undergo major renovations or have their policies lapse, their insurance rates will be reassessed to take flood risk into consideration for the first time. That could lead to higher premiums.
In addition, all property owners may see their premiums increase as FEMA updates flood maps and more are added to flood zones. FEMA recently released a preliminary update to Honolulu County’s flood map, but Humilde said the agency cannot yet say how many more properties would be added to flood hazard areas. The map should be finished in late 2014 or in early 2015.
The looming increases have brought loud protests in some other areas of the country. The Times-Picayune editorialized, “The ramifications are frightening, particularly along the Gulf Coast where tens of thousands of people rebuilt their homes post-Katrina under the old rules... Some of them may be forced to drop coverage."
“But if they have a mortgage, as many people in coastal Louisiana and Mississippi do after Katrina, they won't be able to do that. Most lenders require flood insurance as a condition of a loan. In addition to making flood policies unaffordable for current homeowners, the rate hikes could make some homes impossible to sell because potential buyers couldn't afford the insurance either.&rdquo
So What to Do?
Gabbard did not respond to requests for comment this week about her support for delaying the higher rates.
A spokesman for Hanabusa said the rate increases are unfair because they penalize those grandfathered policyholders who had built their properties up to code before their areas were classified as a flood zone, but through no fault of their own now face exorbitant insurance rates.
In addition, the GAO report noted that the program didn’t keep records of what individual property owners, who were not subject to the subsidy, were charged. That raises the question of how much to charge people when flood risk is factored in.
“The delay will help the National Flood Insurance Program accurately assess risk for each homeowner to ensure that they are not overcharged when their premiums are phased in,” said Hanabusa spokesman Richard Rapoza.
However, Ellis said, “It’s pretty common in Washington that a one-year delay becomes two, and then infinity.”
The University of Hawaii's Fletcher also supports raising insurance rates on properties that are at the greatest risk of flooding.
An expert on the effects of climate change on the ocean, Fletcher said that a delay continues the incentive to build in flood areas even as climate change brings more floods. Forecasting models show that storms that now hit north of Hawaii will strike more frequently in the future.
“Risky areas need higher premiums, not lower ones, in order to discourage development in dangerous locations,” he said.
Original Publication URL: http://www.civilbeat.com/articles/2013/07/15/19482-flood-insurance-rates-could-jump-for-thousands-of-homeowners-in-hawaii/
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