Effect of Biggert-Waters Law passed by Congress
The primary purpose of Biggert-Waters was to extend the NFIP for 5 years, through September 2017. The Act was also designed to implement actuarially based flood insurance rates for at-risk structures. Actuarially sound rates are adequate to cover the average historical loss year, including catastrophic loss years, consistent with generally accepted actuarial principles.
Until now, the NFIP made allowances for pre-FIRM structures—building constructed before floodplains had been mapped and property in the floodplains became subject to floodplain regulations. These structures received subsidized premiums, and affected policyholders paid substantially less for their flood insurance than they would have had to pay if the premiums were based on their actual risk. Not surprisingly, a significant portion of NFIP claims have been paid under these subsidized policies.
Biggert-Waters changes this by phasing in premium increases on flood insurance that move from subsidized rates to actuarially sound rates. Most pre-FIRM subsidized rates and grandfathered rates will be phased out over the course of the next 5 years. Because the annual limitation of premium increases has changed from 10 percent to 20 percent, premiums on other flood policies are also likely to increase at an accelerated rate.
In order to ensure that flood insurance rates more accurately reflect the risk, Biggert-Waters phases out subsidized rates for non-primary (secondary) residences such as a vacation home occupied only during the summer months. Subsidized rates for other property classes are also being eliminated over time, beginning in late 2013.
Previously, about 20 percent of NFIP policies benefited from subsidized rates. Under Biggert-Waters, these subsidies will be phased out by imposing a 25 percent premium increase every year until rates increase the true risk. These changes will affect the following property owners:13
· Owners of non-primary (secondary) residences in an SFHA
· Owners of business properties in an SFHA
· Owners of property that has experienced severe or repeated losses
The owners of primary residences located in SFHAs will retain their subsidized rates unless or until one of the following conditions occurs:
· The property is sold.
· The policy lapses.
· The property suffers severe repeated flood losses.
· A new policy is purchased.
Grandfathered rates are to be phased out for most properties whenever a community adopts a new FIRM. The phase-out will happen gradually over a 5-year period, with a 20 percent rate increase each year.14
Biggert-Waters also introduces many other wide-ranging changes to the 44-year-old NFIP. These include making higher limits of flood insurance available on multi-family properties, introducing minimum deductibles, increasing the penalties for lenders that fail to require flood coverage where required, and establishing a technical mapping advisory council to ensure that FEMA adopts meaningful standards for updating and maintaining flood maps.
To further improve the NFIP, Biggert-Waters also requires a number of studies dealing with a wide-ranging variety of topics such as:
· The possibility of including business interruption and/or additional living expenses coverage
· Methods of increasing both participation and affordability
· Pre-FIRM structures
· FEMA contractors
· The process of determining when a flood event has commenced or is in progress
· The private reinsurance market’s capacity to assume a portion of the NFIP’s risks
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