The WAVE: A Cure Worse Than The Disease

It’s My Turn

A Cure Worse Than The Disease

By Kenneth J. Wilbur

A key goal of the National Flood Insurance Program (NFIP) -- reducing disaster relief by having owners self fund some recovery expenses -- hinges on affordable premiums encouraging broad participation. Even its sponsor, Rep. Maxine Waters, admits B-W has misfired by making premiums unaffordable. For many properties affected by Sandy, $10,000 increases in annual premiums are likely, and increases above this level will not be uncommon.As the first anniversary of Super Storm Sandy approaches, recovery remains a work in progress. Much of this effort will have been wasted, however, unless Congress acts to stop the 2012 Biggert-Waters Act (B-W), from destroying the homeowners it was intended to protect.

Premiums that will not be paid because they cannot be afforded will not increase NFIP revenues. They also will not work as an incentive to compel elevation of existing homes because elevation is also unaffordable. While materials illustrating B-W’s cost-effectiveness used $30,000 as the cost for elevating on driven pilings – a requirement in V zones - this has proven to be a $150,000 expense. Less expensive techniques have still cost over $50,000. Grant programs offer no real relief, as they are available to only a few and exclude the second homes which make up the majority of affected properties.

By counting on unaffordable elevation to make unaffordable premiums affordable, B-W snares tens of thousands of homeowners in a Catch-22. Families required by law to maintain insurance they cannot afford are hesitant to invest in repairing homes they may be forced to sell at a loss. As many sources have reported, anticipated insurance and elevation costs have already delayed recovery, depressed property values and frozen real estate markets, even for homes untouched by the storm. Towns are at risk of blight, eroding tax bases and fundamental change as owners of single-family homes are driven out. This is a lot of hardship to impose for no benefit.

While there is a perception radical reform is necessary because the NFIP was bankrupted by low premiums, in 2012 it collected $3.6 billion in premiums against $2.4 billion in claims. Over its life NFIP has taken in billions more than it has paid on claims. Its problem has been high costs. Administrative expenses consume 37 percent of premiums -- mostly to pay insurers that share no risk to process policies. In contrast, the Affordable Care Act fines health insurers for expenses exceeding 15 percent. B-W does nothing about administrative expenses.

Then there is Katrina. Decades of misjudgments by many federal agencies over how to treat a uniquely vulnerable area, combined with missteps in relief efforts and claims scrutiny, produced $16 billion in payments averaging over $97,000, figures never approached before or since ( Sandy pay- ments averaged $55,000). While placing the full burden of this extraordinary past event on current policyholders is as unfair as doubling the interest on pre-existing mortgages to save Freddie Mac and Fannie Mae, this is the approach mandated by B-W

There is also a misperception the huge increases are the result of elimination of subsides granted to certain older homes. In fact, the major driver of premium increases is elimination of grandfathering, the pre-B-W practice of basing premiums on a property’s compliance with flood zoning and elevation standards mandated at the time of construction. It is important to realize that grandfathering was not a subsidy. Within a zone, premiums were set to cover a zone’s overall risk. It was a means of reducing future risk by permitting standards for new construction to be set without having to consider impact on existing homes. A refinement, updating standards when properties suffered substantial or repeat damage, provided a means to identify and remove through natural attrition the 1 percent of repetitive loss properties involved in 30 percent of claims.

By eliminating grandfathering, BW ignores the differences between elevating an existing home and working from a clean slate. It affects every existing home. A one-foot difference in elevation it would cost nothing to account for in new construction in 2013 can triple premiums on an existing home built in 2012. A shift intoaVzonecancauseatenfoldpremium increase and $150,000 elevation expense – if elevation is possible. Despite these draconian consequences, B-W requires no greater consideration of the impact of a map change on an existing home than it did when changes by definition had no such impact.

Finally, B-W cannot be justified as a climate change measure. Climate change occurs over decades. While possibly requiring some tweaking, the grandfathering/ natural attrition system was a mechanism for action on that time scale. In contrast, B-W embraces the wasteful and disruptive approach of pressuring every home that might ever flood to elevate right now.

B-W is unworkable and turns FEMA, an agency dedicated to helping victims, into an instrument of their ruin. As FEMA’s Administrator testified in recent Senate hearings, however, without action by Congress, FEMA’s hands are tied and will begin implementing B-W on October 1st. It is to avoid this result that StopFEMANow and other groups across the nation are rallying on September 28th to urge your support for legislation to defer implementation of B-W and replace it with a more practical, affordable and equitable approach.

Kenneth J. Wilbur

The author owns a home on the New Jersey shore in Manasquan.