THE NATIONAL FLOOD INSURANCE PROGRAM (NFIP)
IN NORTH CAROLINA
THE ORIGINS OF NFIP
The National Flood Insurance Program in North Carolina, as well as essentially all other states, is changing dramatically and everyone affected by these changes should be taking note. The US Congress provided the groundwork for the National Flood Insurance Program (NFIP) with the National Flood Insurance Act of 1968. Under the management of the Federal Emergency Management Agency (FEMA), it was the intent of the NFIP to provide flood related disaster assistance for any county, community or municipality in the US that was willing to join the program. After joining the program these entities would ensure that any subsequent new construction met the NFIP standards, based on Flood Insurance Rate Maps (Firm) in order to receive favorable flood insurance rates. It was specified that any claims would be paid with money collected from NFIP premiums, but policy was enacted to allow the program to borrow from the US Treasury, if needed. This borrowed money was to be paid back with interest.
NFIP: NOT JUST A COASTAL PROGRAM
While major coastal tropical storm systems have been “heavy hitters” in the course of this program, it is extremely important to note that flooding and the related insurance claims are not just a coastal event. Recently, a major flood event occurred in the Colorado area and many, many times the Mississippi River and its tributaries have flooded areas in the interior of the US. Everyone in the United states should be aware of the flood potential where they live AND that homeowner’s insurance does not cover flood damage. Here in North Carolina, the website, http://www.ncfloodmaps.com/ is a good place to start to educate yourself about the various levels of flood plain and the flood potential where you live.
PRE-FIRM OR POST-FIRM CONSTRUCTION
In very general terms, “Post-Firm” construction relates to buildings permitted and built after the date on the Flood Insurance Rate Maps (FIRM) were issued to the community or municipality by NFIP. But what about the existing construction that was built before the FIRM was issued? These properties likely did not have the benefit of the guidance of the NFIP. Until recently, the lion’s share of these buildings, which are regarded as “Pre-Firm,” were “grandfathered“ into the system and were issued discounted or subsidized rates.
GRANDFATHERED: TO BE OR NOT TO BE
It is important to understand that many properties that were previously, are no longer grandfathered in the NFIP system. Most homes, other that a homeowner’s primary residence, are no longer grandfathered into the system. AS IMPORTANTLY, it is extremely important to understand that this “grandfathering” RELATES TO YOUR “CURRENT” POLICY. If your “CURRENT” policy is canceled for whatever reason and a “NEW” policy is written on a previously “grandfathered” home/policy, you likely will lose all the previous benefits. In short, DO NOT LET YOUR “GRANDFATHERED” POLICY LAPSE! Secondly, it is my understanding that there is a move under foot to abandon ALL grandfathering in 2014, at which time ALL flood policies would be actuarial rated, based on MANDATORY elevation certificates (ECs).
SUBSIDIZED OR ACTUARIAL RATES
As mentioned above, subsidized rates are discounted rates and are set in this manner for a variety of reasons. Rates of various kinds can be subsidized to inject some measure of fairness, which may have been the case initially with the NFIP. This brings us to actuarial rates. Actuarials are the backbone of the insurance industry. Simply put, they are the rate (amount of money) that must be collected to cover the cost of the hazard associated with the insured risk. These rates are based on mathematical and scientific formulas, with little/no weight being given to emotion or outside factors.
Are subsidized rates a thing of the past? The not so short answer is yes …… and no! While subsidized rates are still available, the clock is ticking. Subsidized rates are scheduled to be increased by 25% for the next 4 years until they reach the level based on actuarial rates. Why is this happening? The NFIP has struggled with massive expenditures in the past few decades but the monumental losses in a few catastrophic storms of the past decade are “where the wheels came off the wagon.”
THE FLOOD INSURANCE REFORM ACT OF 2012
There have been numerous flood related reform acts of congress since 1973 but the Flood Insurance Reform Act of 2012 is quite clear. This legislation mandates that the Federal Emergency Management Agency (FEMA) should raise flood insurance rates to reflect the “true” potential loss from flood (actuarial rates) in order to stabilize the financials of the NFIP.
Does this mean that everyone’s flood insurance rates will be higher? The good news is that this “based on threat” adjustment of NFIP will mean that the homes built at or above the Base Flood Elevation (BFE) in their area will likely see little/no change.
We have recommended for years that homeowners experiencing elevated flood insurance premiums, who did not have an Elevation Certificate (EC), get one to have their properties rated properly. It is my understanding that this will possibly be required in the new rating system for all properties. I plan to be proactive and discuss my options with a knowledgeable insurance agent. I also feel compelled to mention AGAIN that if your property is “grandfathered,” do not let your policy lapse.
Many people have or soon will be surprised by NFIP changes that took effect on October 1, 2013. These changes are “in the books” but others are in the pipeline. Be proactive! Knowledge about the National Flood Insurance Program in North Carolina is the key to making the best decision.