For years the availability of federally backed flood insurance was an on-off affair. The program was $18 billion in debt to the U.S. Treasury, largely because of Hurricanes Katrina and Rita in 2005, and Congress would only renew the program for short periods of time because it wanted to delay long-term reauthorization until top-to-bottom program reforms were included. The result was uncertainty in the marketplace to an extreme level, with no fewer than 17 last-minute program reauthorizations in just a few years and two actual shut-downs. Not a good situation in areas where flood insurance is required to get a loan and the National Flood insurance Program (NFIP) is the only insurer in town.
Congress finally enacted long-term reauthorization last year and as part of that included long-sought reforms to help improve the actuarial soundness of the program.
What these long-sought changes mean, though, is a gradual phase-out of insurance subsidies that go to a small percentage of property owners.
The phase-out of subsidies is part of the package of reforms that are intended to make the flood insurance program more financially sound. For years, a small portion of property owners have been paying far below the actuarial cost of their policies because of previous legislation. In some cases, the premium subsidies were for properties that were in areas in which outdated flood maps had been grandfathered in. In other cases, the subsidies were for properties that pre-date the drawing of their area flood maps. These are referred to as pre-FIRM properties ( with “FIRM” standing for “flood insurance rate map”).
In all, there are several classes of property that have had their flood insurance premiums subsidized over the years, and now, starting this year, their subsidies will start to phase out gradually. That means that some owners will face rising insurance premiums over the next few years.
No one can be expected to like seeing their subsidies phased out, but for supporters of reform, it was either that or not having any flood insurance available at all.
You can learn more about the phase-out in the 4-miniute video above.