Flood insurance rates set to skyrocket
When the summer of 2013 unleashed its fury — sending floodwaters from swollen creeks and overwhelmed sewer systems surging across homeowners' properties — many of Denise Schaults' insurance clients thought they'd seen the worst.
But the storm's not over for some property owners, who could have their flood insurance premiums rise by as much as 25 percent on Tuesday when federal subsidies from the National Flood Insurance Program begin disappearing, said Schaults, vice president of insurance operations at Christie and Associates in Scott.
Only 18 percent of Americans have flood insurance, and for those who do, the National Flood Insurance Program is the only provider. The government has subsidized about 20 percent of property owners in the most flood-prone areas to make the insurance more affordable.
But the program has been strained — recently posting a deficit of $28 billion — largely because of enormous payouts from events such as Hurricane Katrina in 2005, which caused more than $108 billion in property damage, and Hurricane Sandy, which last year resulted in more than $65 billion in damage.
To stem the losses, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012, which ends federal subsidies for flood insurance for properties in flood zones and mandates that everyone pay “true-risk” rates for their property by late 2014. True-risk rates are calculations done by the insurer to determine how likely it is that flooding will occur and how much damage will be done.
In Western Pennsylvania, Allegheny, Washington and Westmoreland counties have the largest number of property owners affected by the changes, according to federal records.
In Allegheny County, 4,039 people receive the subsidy. In Westmoreland County, there are 1,400 recipients, and in Washington, there are 1,004, records show.
Complex, confusing issue
When the changes take effect:
• Owners of subsidized policies on property that has had severe or repeat flooding will experience a 25 percent increase annually until the rates reflect the “true risk.”
• Policyholders on businesses or nonresidential properties in areas designated by the insurance program as “special flood hazard areas” with greater risks for flooding will have their rates increase by 25 percent each year until the rates reach the “true risk” level.
• Primary residences that recently were purchased or have had a lapse in insurance coverage will have their rates increase based on a number of factors, including location.
• Eventually, all subsidies will end.
It's a complex issue, made more complicated by the formulas and factors used to determine how much property owners will pay.
Adding to the confusion is the fact that many people might not know their flood insurance is federally subsidized until they attempt to renew their policy and realize the price has increased, Schaults said.
“We understand there's a little bit of sticker shock,” said Peter J. Herrick Jr., external affairs specialist for the Federal Emergency Management Agency.
FEMA suggests that property owners contact their insurance agent if they aren't sure whether they receive the subsidy.
And “agents should be reaching out to homeowners, letting them know what is coming down the road,” Herrick said.
Robert Detlfsen, vice president of public policy for the National Association of Mutual Insurance Companies supports eliminating the subsidy because the program is in debt.
“We want it to remain viable,” he said of the federal program, “and in order for it to be viable, it needs to be solvent and needs to move toward risk-based pricing.”
Of the policies that are subsidized, rates are 40 to 45 percent below what the “true risk” rate would be, according to federal records.
“People have been paying a rate they think reflects the risk of flooding when, in fact, the risk is much higher,” Detlfsen said.
‘It is going to be devastating'
Etna is often hard-hit by flooding, such as in 2004 when the remnants of Hurricane Ivan sent Allegheny River tributaries flowing over their banks. Borough manager Mary Ellen Ramage said flood insurance costs about $600 a year for typical homes, ranging in price from $30,000 to $100,000.
To keep rates down for residents, the borough participates in several programs — implementing public education and warning systems — that improve the community's rating in the eyes of the National Flood Insurance Program.
“We're not talking about half-a-million dollar homes here,” Ramage said. “For people to afford to buy them, obviously the insurances they're required (to have) can't prohibit them from affording them.”
In Ligonier, where picturesque properties dot the shores of the Loyalhanna Creek, flood insurance on a $100,000 house costs about $800 a year. The cost is determined by the home's location on the flood plain, its elevation and other factors, according to William Formato Jr. of Ligonier Valley Real Estate.
“It's significant, what's going to happen to these people, especially the people who are losing the subsidy,” said Mike McGroarty Sr. of McGroarty & Bradburn Insurance in Robinson. “It is going to be devastating.”
Many believe the changes will lead to fewer property owners purchasing the insurance.
Formato said the rules will be a game-changer for people who want to buy homes in waterfront areas where many lenders require flood insurance.
“It will stop people from buying a house,” he said. “Just regular flood insurance throws (the price) over so they can't buy a home.”
Formato said that any time insurance rates are increased, the housing market feels the pinch.
On the flip side, the change could leave some stranded with homes they can't sell.
“An increase in flood insurance rates will make selling a home in a flood plain even more of an issue,” said Wexford Realtor Kathy Seaton, who has worked in Shaler, which has the highest number of subsidized homes in Allegheny County with 161.
“It will make or break some buyers in deciding if they can afford the added monthly cost of flood insurance (added in to) their mortgage payment,” she said.
Many homeowners living near water adjust the price of their house down to accommodate for the cost of flood insurance, said Washington County real estate agent Betsy West. The average flood insurance in her area is about $1,200 a year, she said.
Kate Wilcox is a staff writer for Trib Total Media. She can be reached at 724-836-6155 or email@example.com.