Legislative changes in 2014 undid much of a 2012 attempt to put the NFIP on a sounder financial footing. Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 as part of a bill reauthorizing the NFIP. It attempted to make rates charged accurately reflect the true flood risk of each property, thus making the program actuarially sound.
The 2012 law put a 5 percent surcharge on all but the lowest-risk policies to create a reserve fund to cushion against future losses. But the most controversial measure intended to drastically reduce the discount received by insurers of older properties in high-risk areas, a discount generally called a subsidy.
Starting in October 2013, three formerly subsidized groups saw the phase-out begin:
- Non-primary residences (typically vacation homes).
- Structures with severe repeated flood losses.
Rates for these groups were scheduled to increase 25 percent per year until actuarially sound rates were reached. Other subsidized policyholders would keep their subsidies until the property was sold, the policy lapsed, a new policy was purchased or the property suffered “severe, repeated flood losses where the owner refuses an offer to mitigate.”
The plan was unpopular, particularly in the Southeast, where many subsidized policies existed. Congress responded with the 2014 rollback.
The new law repealed and modified parts of Biggert-Waters, as well as making additional changes to the flood insurance program. Other parts of Biggert-Waters remained unchanged.
Refunds: Refunds applied to policyholders in high-risk areas who were required to pay full-risk rates after they purchased a new policy on or after July 6, 2012. Policyholders who renewed after March 21, 2014, and received an increase of more than 18 percent may also be eligible for a refund.
Policyholders who received typical annual rate increases in 2013 or 2014 or paid the Biggert-Waters surcharge that created a reserve fund would see refunds only if their policy renewed after March 21, 2014, and their total increase (premium plus reserve fund) exceeded 18 percent.
FEMA noted that “only a small percentage of the overall NFIP policy base” was eligible for a refund. Refunds began in October 2014.
Subsidies: The new law stipulated that subsidized policies would receive gradual rate increases. Most of these properties must receive 5 percent annual increases until they are charged the full risk rate. In most cases, rate increases are capped at 18 percent per year. Exceptions include:
- Older business properties paying subsidized rates.
- Older non-primary vacation homes paying subsidized rates.
- Frequently flooded properties paying subsidized rates.
- Buildings that have been substantially damaged or improved that were built before the local adoption of a Flood Insurance Rate Map (FIRM).
While FEMA developed guidelines on rates, purchasers of subsidized properties were allowed to assume the prior owner’s policy and rates. Lapsed policies receiving pre-FIRM subsidized rates were reinstated with pre-FIRM rates until FEMA developed rates as mandated by the 2014 act.
Surcharges: The 2014 act created surcharges to help fund the subsidized policies. A policy for a primary residence was assessed $25. Other properties were assessed $250. All policies are scheduled to pay the fees until the pre-FIRM subsidies are eliminated.
Grandfathering: Often when the lines on flood maps were redrawn, some properties ended up in higher risk zones than before, but they continued to pay lower rates. The Biggert-Waters Act required 20 percent annual rate increases until these grandfathered properties were assessed full-risk rates. Under the 2014 act, homes and businesses that were built to code, then remapped into a higher risk area will not receive a rate increase. Properties moving into Special Flood Hazard Areas would pay the subsidized premium in the first year, then the rate increases assessed on all such properties would be between 5 percent and 15 percent annually, with no single property receiving more than an 18 percent increase.