The Realities of NFIP Insurance

The Realities of NFIP Insurance: Looking at Risk, and Cost

By Justin Stoltzfus

As investors and property owners think about changing their real estate holdings based on flood risk, the federal government is also making big changes to its traditional policy of using tax dollars to subsidize flood-prone properties. Recent changes in flood coverage going back several years seek to deal with financial equations that many see as out of control, but that have largely gone unnoticed until a rash of superstorms and disasters has led to big battles over restoration and funding.

Who Pays For NFIP Policies?
We know that unlike in private insurance, where costs are paid by policy holders, the majority of traditional NFIP coverage is paid for with tax dollars - experts estimate that about two thirds of the program is covered by federal subsidies to property owners. We also know that the NFIP program is now in the hole to the tune of billions of dollars, up to nearly $20 billion after Katrina, by some estimates, and over $25 billion in debt by the end of last year, when legislators passed the Biggert-Waters reform act that will eventually strip away subsidies.
Essentially, then, we all pay for flood insurance, but each in our own ways. Like other kinds of costs that get paid with tax dollars, people dont notice as much as they do when they need to fork over money individually. That means new changes will have a big effect on property owner psychology, as individual owners get pushed to purchase more and more expensive insurance policies, or get left holding the bag when they cant sell properties associated with high flood risk and high insurance prices.

Local Coverage of a National Phenomenon
Some of those who are sounding the warning call about the NFIP program changes and its effects on individual homeowners and investors are reporters settled in relatively obscure parts of the country, where there wasnt a lot of noise about flood insurance prior to 2013.
One excellent example is at Penn Live, a Central PA digital media venue based in Harrisburg, where this online platform started detailed coverage of NFIP changes early in 2014. Reporter Jeff Frantz put together a series of over a dozen articles asking different questions about FEMAs flood insurance program and talking about its effect in real, concrete situations.

Boots On the Ground Situations
Reporting like Frantzs puts the realities of NFIP coverage in stark terms. For example, you might not think much about a program where a property owner paid 1% of a property value annually in a subsidized flood policy. If, after the subsidies are taken away, that same property owner is paying, say, 4% monthly, or $400 a month on a $100,000 home, you have to ask different questions about where the money can come from. There is a somewhat standard assumption used by mortgage companies and other experts about the limited incomes of those in a certain property value range, and these models would assume that someone putting equity into that $100,000 property cant afford $5,000 a year in insurance premiums.

There are also a number of very relevant rules here for investors  one is that anyone looking at investment property has to understand that big flood risks arent just for specialty markets or specific areas of the country. News from the landlocked Susquehanna Valley shows that you dont have to be in Miami or Malibu to get hurt by flood insurance risk.

Another point here is that changes can happen suddenly, and in many different types of unanticipated ways. Here, there is the gradual pulling off of the curtain related to structured flood insurance reforms, where premiums seem to be spiking as subsidies go down  but there are also other possibilities related to the vagaries of the local market, where a property may have higher flood risks in future years, either because of flood zone re-drawing, storm water infrastructure or other factors. Investors are learning that flood risk is making the real estate game more like a game of hot potato, where its not always possible to divest from properties before the hammer comes down.

The upshot, for investors, is that real estate has changed, and will change, and that keeping liabilities like flood risk front and center is a way to protect yourself from somewhat innocuous portfolio dangers. Experts often talk about the subject of due diligence: here, in certain real estate holdings, it goes deeper than looking at earnings or perusing a candlestick chart: you have to know where to look to get data on the real risks, and what they could do to your gains. Get vigilant on flood risk, or pay someone else to do it for you, but dont assume that the values you see today will hold for tomorrow.