March 24, 2023

Mortgages: On Floods and Rising Insurance Premiums

Premiums for the National Flood Insurance Program are certain to rise in coming years as a result of a Congressional mandate to bring them into line with real risk levels. The question is, by how much?

The Federal Emergency Management Agency is updating flood hazard maps to assess present-day risks, but until the redrawn maps are finalized, and the rates revised, neither homeowners nor mortgage lenders can accurately estimate the affordability of future premiums.

FEMA is also phasing out the subsidized rates granted to policyholders with homes built before local flood maps were first drawn. The agency estimates that about 20 percent of the 5.5 million policyholders receive these subsidies.

The unknowns around flood insurance rates could pose a problem for lenders, especially because, under the terms of the Dodd-Frank Act, they must document a borrower’s ability to repay a mortgage over the life of the loan, said Doug Rossbach, a vice president in charge of the mortgage banking practice at North Highland, a global consulting firm based in Atlanta. “Premiums could go skyrocketing,” he said. “The lender is in a pretty tough spot. How can the lender know if the borrower can afford to stay in the property, or spend the money to elevate that property?”

Once the maps are revised, some coastal property owners who don’t pay for flood insurance may have to. Lenders haven’t necessarily recognized that yet, as Mr. Rossbach recently discovered when he applied to refinance his house in Rumson, N.J. His house flooded during Sandy, and although he hadn’t been in a flood zone before, preliminary map revisions show that he will be. The lender “never asked me about flood insurance,” he said, “because the effective maps don’t show me in a flood zone. But lenders are beginning to pick up on this, and it’s going to make it tougher for the consumer.”

Chad Berginnis, the executive director of the Association of State Floodplain Managers, noted that homeowners in high-risk areas can significantly cut their premium — which could go as high as $30,000 a year — by elevating their house above the flood level. Homes with structural changes that make them less flood-prone are also likely to rise in value, he said. But, he added, the construction costs can be daunting.

In the Jersey Shore town of Toms River, inland houses are selling, but when it comes to the Sandy-affected properties on the waterfront, “unless you’re giving homes away, no one is buying or selling,” said James A. Flanagan, the broker of record at Coldwell Banker Flanagan Realty. The “big box” lenders are not making loans, leaving it to a few local banks. But even then, Mr. Flanagan said, “buyers want to know, what’s my flood insurance going to be, and I can’t blame them.”

Most of the owners he knows have repaired the damage to their homes, generally using insurance money and their own funds. Now, he said, they are waiting to find out whether they need to raise their houses, what it will cost, and how much they will ultimately pay in flood premiums.

“It’s got us in a pretty good pickle down here,” he said.

A recent report commissioned by FEMA suggests that more homeowners will be confronted with this dilemma in years to come.

The report predicts that, because of climate change, rising sea levels and population growth, the portion of the country at risk for flooding will rise by 40 to 45 percent by 2100.

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Bucks Blog: A Refresher on Hurricane Deductibles and Flood Coverage

A man in New York City sweeps water out of his apartment after Hurricane Sandy.Getty ImagesA man sweeps water out of his New York apartment after Hurricane Sandy.

If you were affected by the wrath of Hurricane Irene last year you may already know this, but it bears review in the wake of Hurricane Sandy: Damage caused by surging storm water generally isn’t covered by your homeowner’s or renter’s insurance policy.

Rather, you’ll only have coverage if you purchased a separate flood insurance policy, either from the National Flood Insurance Program or a handful of private firms.

The national flood policy covers damage for up to $250,000 to the structure of your home, and $100,000 for personal possessions. Note that the N.F.I.P. policy provides “replacement” cost coverage for the structure, but only “actual cash value” coverage for your belongings.

Damage from wind, however, is covered by homeowner’s insurance policies — but it’s likely to be subject to a special “hurricane deductible,” which is different from the policy’s standard deductible. Coastal states from Maine to Texas have special rules for hurricanes, put in place to limit insurance losses after catastrophic storms. Details vary, but in general when a hurricane (or, in some cases, a named storm) is declared by the National Weather Service, special hurricane deductibles apply for resulting damage.

The standard deductible is usually a flat amount — $500 or $1,000, for instance. But hurricane deductibles are generally a percentage of the home’s insured value and usually run from 1 to 5 percent. So, for instance, if a home is valued at $300,000, the deductible could be as high as $15,000.

Please let us know what conversations you’ve had with your insurance companies so far in the wake of Hurricane Sandy.


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Irene Damage May Hit $7 Billion, Adding to Insurer Woes

Most of the loss will very likely come from property in New York and New Jersey, according to industry experts. Although Irene had diminished to a tropical storm by the time it reached New York early Sunday, those two states have the most valuable coastal property on the Atlantic Coast.

At $7 billion in possible losses, Irene would be among the 10 costliest catastrophes in American history, according to the Insurance Information Institute.

The most expensive disaster by far was Hurricane Katrina in 2005, which caused $45 billion worth of damage, not counting costs that were covered by the National Flood Insurance Program. The second, at about $23 billion, was the Sept. 11, 2001, terrorist attacks on the World Trade Center and Pentagon, which the institute counts as a single event.

All but one of the remaining top 10 were hurricanes, ranging in cost from $22 billion for Hurricane Andrew in 1992 to $6 billion for Hurricane Rita in 2005.

Insured losses in the Carolinas from Hurricane Irene were estimated Sunday at $200 million to $400 million by Eqecat, a company in Oakland, Calif., that models the effects of natural disasters. The company said that parts of North Carolina and Virginia had received 20 inches of rain, more than had been forecast, and that more than a million people were without power after Irene, which was ranked a Category 1 hurricane when it came ashore there.

In the Caribbean, Irene caused an estimated $500 million to $1.1 billion worth of damage, most of it in the Bahamas, where it was a Category 2 hurricane, but also in Puerto Rico, the Dominican Republic and other territories, according to AIR Worldwide, a Boston company that analyzes the cost of storm damage.

Even before the current Atlantic hurricane season started in June, American property insurers had run through a typical year’s worth of catastrophe payouts because of an unusual string of severe natural disasters. Their losses could grow even more, because forecasters have been predicting an above-average hurricane season this year.

The A. M. Best Company, which rates the financial strength of insurers, called the level of natural disasters this year “unprecedented” in a report on the American insurance industry issued last week. The company, based in New Jersey, said disaster-related losses this year had already exceeded the total for all of 2010. It estimated the losses at $27 billion through June 30, compared with $11.9 billion in the first six months of last year and $19.6 billion for all of 2010. The company based its findings on a survey of roughly 150 insurers, which it said accounted for 80 percent of the industry.

A. M. Best said the year’s series of major disasters would hurt insurers’ earnings, but was unlikely to threaten their capital. It noted, though, that the industry would “be tested through the remainder of 2011, as budgets for catastrophe-related losses already have been exhausted.”

Moody’s Investors Service said many property and casualty insurers were still profitable in the storm-ridden second quarter of this year, but their profits often shrank compared with the second quarter of 2010, and their reserves to pay claims had diminished and would have to be rebuilt at some point. A few, with large operations in the Midwest and Southeast, swung from profits to losses, Moody’s said, including Allstate, Hartford Financial Services, Travelers and Cincinnati Financial.

Moody’s research covered only the publicly traded insurers, not mutual companies like State Farm, which has the largest share of the personal insurance market in the United States. State Farm has disclosed payouts of more than $2.5 billion through May of this year.

Some of the losses for American companies grew out of catastrophes in other countries, including the powerful earthquake and tsunami that hit Japan in March and an earthquake in New Zealand in February that was followed by floods and destructive aftershocks.

In the United States, there were blizzards in the Midwest, fires in the Southwest, severe tornadoes in the Southeast, a hailstorm in Oklahoma that did more than a billion dollars’ worth of damage and flooding along the Mississippi and other rivers. The worst losses arose from the tornadoes and hailstorms that hit in April and May, including the tornado that struck Joplin, Mo., on May 22 and the one in Tuscaloosa, Ala., on April 27.

Eqecat said tornadoes alone were costing insurers up to $18 billion so far this year, with up to $7 billion of that from just three days, April 25 through 28. Most of the claims involved damage to homes and cars, and companies that sell personal insurance are taking a bigger blow than those that sell coverage to businesses.

Eqecat said those three days were “likely the most expensive tornado outbreak ever in the United States.”

Motoko Rich contributed reporting.

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