Study finds Floridians are underpaying for flood insurance

MIAMI (AP) - If you live in Florida, you should probably be paying more for flood insurance. And you likely will be soon.

That first finding is the conclusion of a new analysis by First Street Foundation, a nonprofit research group focused on climate impacts on property value, which found that the majority of Floridians face a higher flood risk than their insurance costs would indicate.

The second prediction comes because the National Flood Insurance Program is rolling out a new way of pricing flood insurance later this year. Experts expect it will lead to higher rates for homeowners in flood-prone places like Florida. Potentially, a lot higher in some places.

For example, the average premium in the city of Miami is $1,069 a year, by First Street’s calculations. The “proper” price, the nonprofit found, is around $1,500.

In some cities, like Miami Beach, the calculations show flood risks are currently wildly underpriced. It would take nearly a tenfold leap from the average price to bring it in line with risks - which adds up to a $20,000 annual premium. In lucky others, like South Miami, the research actually showed a 16% decrease, indicating that residents are perhaps overpaying for their risk.

The First Street analysis is among the first to estimate how much higher premiums could rise, although FEMA - which will set rates for the national flood program - stresses it is “premature” to compare the study to its yet-to-be-released new rate formula.

Nationally, First Street found about 4.2 million properties facing major flood risk, and those properties would need to pay about four and a half times more than the NFIP charges to cover that risk. About one in four of those properties are in Florida.

This research backs up what experts have been saying for decades: The NFIP undercharges for flood insurance, which makes it cheaper and easier for people to live in dangerous places. That’s a problem worsened by the climate change-driven sea level rise that makes coastal spots riskier every year.

Floridians are used to sticker shock over home insurance, with much of it coming because of the high cost of windstorm hurricane insurance, a category of coverage largely abandoned by large insurers years ago. The $1,960 average premium is the second-highest in the nation. But flood insurance has always been far cheaper - at a national average of around $800. That could change soon.

The First Street analysis shows that to get out of the red, the NFIP will have to charge a lot more. And that trend only continues as seas rise. The analysis found the costs of insuring those same areas in 30 years could be double or more in many places, including South Florida.

Because of new federal caps, massive rate hikes will not all come in one year, but industry analysts say homeowners may face years of consecutive increases to bring the cost in line with projected risk - not unlike what has happened with windstorm rates. Ultimately, it may also impact property values and not in a good way.

“So you can imagine your insurance rate goes from $1,500 to $5,000, and you know in 30 years it’s going to go to $10,000 in today’s dollars,” said Matthew Eby, founder and executive director of the First Street Foundation. “When you have dramatic increases like that you have a drop in value because the cost of ownership goes up.”

A 379% INCREASE

Users can find out First Street’s estimated insurance costs for any address using the organization’s online Flood Factor tool, which also allows users to tweak details about the property (like its first-floor elevation) for more accurate results.

First Street researchers came up with their figures by calculating how much damage a property would take from what’s known as a 1 in a 100-year storm, the basis for FEMA’s flood zones. Then they divided that damage by 100 to come up with an estimated average annual loss.

Their numbers were several factors higher than what the NFIP charges in a year. In Florida, they figured that the average property owner in a flood zone should be paying 379% more per year.

The analysis is limited in several ways. It only takes into consideration buildings with four units or fewer, so most apartment buildings and condominiums aren’t included. It also used a national service used by banks to estimate home values, but like real estate website Zillow’s “Zestimate,” they aren’t always accurate.

In a statement, David Maurstad, senior executive of the National Flood Insurance Program, said FEMA encourages “innovation and exploration” in technology that teaches people about flood risk but cautioned that First Street’s initiative shouldn’t be seen as a perfect comparison for the NFIP’s upcoming rate structure.

“Any entity claiming that they can provide insight or comparison to the Risk Rating 2.0 initiative, including premium amounts, is misinformed and setting public expectations that are not based in fact. While entities are free to suggest or estimate their opinion of what flood insurance premiums should be, they are offering exactly that - an opinion - and they do not have insight into the Risk Rating 2.0 initiative.”

First Street’s analysis also doesn’t take into account which properties have a flood insurance policy, which is only mandatory in certain areas if buyers are using a mortgage. And not everyone follows the mandates. A recent review of mortgages backed by the federal government in Florida showed that only about 65% of homeowners required to buy flood insurance had a policy.

Floridians hold about one-third of all NFIP policies in the country, according to the Insurance Information Institute. Miami-Dade alone accounts for a fifth of those, more than the entire state of California.

That makes the upcoming changes to the NFIP all the more important for the Sunshine State.

On Oct. 1, every single NFIP policy in the country will switch to a new way of calculating risk, and therefore change the way it comes up with the price homeowners have to pay every year.

Critics have long pointed out that the federal flood insurance program effectively subsidized coastal homes at the expense of taxpayers by holding insurance rates artificially low. This new change - called Risk Rating 2.0 - is part of a grand plan to bring the NFIP out of its $20 billion debt caused by paying out more than it collects. Devastation from Category 5 Hurricane Katrina and several other storms in 2005 threw the program into what has been perpetual red ink ever since.

Rebecca Elliott, an assistant professor at the London School of Economics and Political Science and author of the new book “Underwater: Loss, Flood Insurance, and the Moral Economy of Climate Change in the United States,” said the program has always been torn between calls for pricing that keeps people from living in vulnerable areas and offering affordable coverage.

“The entire history of the NFIP can be told as a debate about what we should price risk at,” she said. “Do we want flood insurance to help people be able to acquire wealth and buy a home? Or do we want it to accurately show a market signal for risk? The program has tried to do both.”

Right now, the NFIP comes up with a premium based primarily on whether or not a home is in a flood zone, a designation based on maps that are often out of date. It only considers flooding from hurricane-driven storm surge or river flooding.

FEMA has been tight-lipped about the details on Risk Rating 2.0, which was initially scheduled to roll out in October 2020 but was pushed back a year due to political pressure. That’s left policy experts and government officials in the dark about some of the most important upcoming changes, including how much rates will increase.

The last time anyone tried to make flood insurance prices more financially sound was in 2012 with the Biggert-Waters Act, which was quickly undone after it sent coastal premiums skyrocketing. One memorable example was when a $1,900 annual premium on a $300,000 house in the Florida Keys leaped to $49,000.

But this time, there are federal caps on rate increases. For primary homeowners, it’s 18% plus fees, and for other properties, it’s 25% plus fees.

‘A GRAYSCALE GRADIENT’

What FEMA has said is that under Risk Rating 2.0 it will consider rainfall and tidal flooding driven by sea level rise, and premium prices won’t be tethered to where a home is on a map.

Anna Weber, a senior policy analyst at the Natural Resources Defense Council, said that will likely mean that homes within a flood zone will be charged different premiums depending on their estimated individual flood risk. For instance, a waterfront home might pay a higher rate than a home five blocks back, even though they’re technically in the same flood zone.

“In the current system, there’s only black and white. It seems very clean, but of course, the floodwaters don’t care if you’re on the one side of the street that’s out of the mapped flood zone,” she said. “It’s going to be more of a grayscale gradient, which is much more closely tied to reality.”

It’s not clear how that will affect people whose property isn’t currently in a flood zone, even though they may have flood risk. First Street’s analysis found almost 400,000 properties with flood risk that weren’t in a flood zone in Florida, nearly the same amount of homes that were in a flood zone.

This is the group that would likely see the biggest hike in premiums and be the most surprised by it since they aren’t legally required to carry flood insurance. By First Street’s calculations, they would see a 673% increase to the average premium of $461.

“They’re in the worst spot because no one’s told them they have the risk. … At some point, they’re going to realize everyone knew but them,” Eby said.

The shift to Risk Rating 2.0 is limited, however. Only Congress can make changes to flood insurance requirements or rate caps, so those homeowners won’t be suddenly legally required to purchase it.

To avoid unexpected hikes if they do choose to buy a policy later on, Del Schwalls, director for the southeast region of the Association of State Floodplain Managers, recommends homeowners without flood insurance purchase a policy now.

“So that when October 1 hits, if their premiums do go up, they’ll be protected by that premium cap,” he said. “Versus if they try to get a policy after then they’ll have to pay the whole new premium.”