Recent news reports on the roll-out of reforms to the National Flood Insurance Program have focused on astronomical increases in rates faced by some home and business owners. This language from an ABC News report has been fairly common:

New flood maps threaten to saddle some homeowners who are paying a few hundred dollars a year now with annual premiums of more than $20,000.

There also have been anecdotal reports of rate rising to $30,000, $45,000, even $60,000 a year. That’s particularly shocking when you bear in mind that the NFIP only offers up to $250,000 of coverage.

But how common are these sorts of increases, really? Unfortunately, the Federal Emergency Management Agency has not been terribly transparent about its rate map project, which the Biggert-Waters Flood Insurance Reform Act requires the agency to complete by next year. Many properties of the NFIP’s 5.6 million properties will see rate reductions under the updated, hopefully more accurate maps. Those that require rate increases will see them phased in over a five-year period.

But the Biggert-Waters Act also calls for long-standing subsidized rates to be phased out over a four-year period for some of the 1.1 million NFIP policyholders who currently receive them. The phase-out started in January for 345,000 second homes, while 87,000 business properties and 9,000 repetitive loss properties saw their subsidies begin to be phased-out in October. The remaining 715,000 subsidized policies will revert to actuarial rates when the properties are resold.

Coverage of a recent hearing on the law further offers this nugget:

Testifying at the same hearing, FEMA Administrator Craig Fugate defended the law, saying FEMA estimates subsidized policy holders should be paying $1.5 billion more than they do now. About 1.1 million of the 5.6 million policy holders pay subsidized rates, he said.

If ending subsidies on all the 1.1 million subsidized policies would raise an additional $1.5 billion annually, that comes out to about $1,363 per year, or $113 more per month. And that’s an average. If there are some policies that really should be paying $25,000 a year, that means many more policies that would see increases of significantly less than the average.

This is not to minimize the impact of a $25,000 annual premium. Very few people could make those sorts of payments. But thankfully, very few people are being asked to.

Indeed, what’s important to bear in mind is that a $25,000 premium suggests a home that would suffer a complete loss roughly once every ten years. If there exist policyholders who evaluate that risk-reward trade-off and find it compelling, more power to them. But it would be (and indeed, it has been) remarkably unwise public policy to in any way subsidize such an arrangement and put that risk on the backs of taxpayers.

A $25,000 premium offers a price signal that one should strongly consider mitigating one’s risk, or getting out of harm’s way.

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