Flood Program Puts Industries at Odds - Changes to a government insurance program is pitting the real-estate and insurance sectors against each other. Insurers say mounting claims justify steep premiums, but property groups fear cost to homeowners will dry up sales.

From The Wall Street Journal:

The real-estate and insurance industries are at odds about changes to a government program that provides insurance against floods amid skyrocketing bills for property owners.

Insurance bills are rising for homeowners and businesses under the National Flood Insurance Program, which protects 5.5 million properties in flood-prone regions.

Under changes designed to shift more of the cost to property owners, some people have seen premiums jump from a subsidized level of several hundred dollars a year to more than $10,000. Other property owners are facing smaller but still steep increases at 25% annually.

 

Real-estate agents and home builders, reacting to a regional impact on housing markets, have mounted an aggressive lobbying campaign to stop the changes, rounding up a bipartisan group of lawmakers who are pushing legislation to delay the increases for four years. Congress is expected to take up the issue next year, with a big push coming from lawmakers in Louisiana, New Jersey and other coastal states.

 

The insurance industry, however, wants the increases to proceed largely as planned, with some companies looking to expand private flood-insurance offerings as an alternative to the federal program. Conservatives and environmental groups also oppose rolling back the law, arguing rates that don't reflect true flooding risk are bad for taxpayers and encourage development in sensitive areas.

 

Caught in the middle are property owners like Lucille Costa. Ms. Costa, 51 years old, said a buyer backed out of a $157,000 offer for her two-bedroom rental house near a river in Somerset, Mass., in October after learning flood insurance would cost $22,000 annually—up from the $1,700 she pays.

 

"I don't blame them," Ms. Costa said. "I would have done the same thing."

 

Some homeowners fear losing their homes if Congress doesn't act soon. Sandra Bell, 58, and her husband moved last year to a $125,000 house in a neighborhood overlooking a marsh in Brunswick, Ga. Ms. Bell was unaware her flood-policy bill was poised to rise to $5,875, from about $1,300. "It is just a matter of time before the bank will foreclose on us," she said.

 

The insurance program was created in 1968 when private-sector insurers considered flooding too risky. The government mandates the coverage for homes with mortgages in flood-prone areas.

 

The program is $24 billion in debt to the Treasury, partly as a result of last year's superstorm Sandy, which through Sept. 30 has led to 127,579 claims worth $7.36 billion. Hurricane Katrina, in 2005, holds the record with 167,730 claims worth $16.28 billion in claims.

 

Under 2012 changes to the federal flood insurance program, second homes, businesses and properties with multiple prior losses became subject to rate increases of 25% annually until they reach market rates. Most primary residences paying below-market rates were excluded from increases unless they change hands. Upon a sale, rates rise to market levels.

 

Insurance groups fear a delay will turn into a cancellation of the increases, and that it will be impossible to replicate the program's 2012 overhaul., which occurred after years of debate in Congress.

 

Many insurers, some of whom already sell flood coverage in countries with robust private-sector flood-insurance markets, have been investing in improved U.S. flood computer models in anticipation of an opportunity here. once more rates rise to market levels."The [financial] capacity exists in the private sector," Ed Noonan, chief executive of reinsurer Validus Holdings Ltd, said during a recent earnings conference call.

 

Rather than undo the rate changes, some insurers have suggested the government directly assist lower-income consumers who can't afford the hikes.

 

"Instead of overreacting in a panicked way and reversing the reforms, we ought to find a targeted approach to bring relief where it is actually needed," said Jimi Grande, an executive with the National Association of Mutual Insurance Companies.

 

The Federal Emergency Management Agency, which runs the program, is pressing ahead with changes to the program. "We're implementing the law as directed by Congress," said Dan Watson, a FEMA spokesman. FEMA collects more than $3.5 billion in premiums annually, short of the $5 billion it estimates it needs to match the program's exposure to losses.