The Biggert-Waters Act: What Does It Do, and What Next?

Drafted in the wake of the 2004/2005 hurricane season and Superstorm Sandy, the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12, or Biggert-Waters) makes a number of changes to the National Flood Insurance Program (NFIP).  The changes are primarily rate increases or re-mappings to “reflect true flood risk.”  Essentially, BW-12 eliminates, or gradually eliminates, subsidies for properties that do not meet current construction and elevation standards. Those that do meet the standards will continue to be subsidized.

BW-12 has two main sections: 205 and 207. Section 205 eliminates the grandfathered status for buildings that do not meet current standards and were not re-mapped, and section 207 deals with those properties that were re-mapped.  Though FEMA is currently undertaking a study of the affordability of BW-12, articles have quoted FEMA saying that only 87% of FEMA’s Floridian insureds will be affected by BW-12.  This makes Florida an NFIP “donor” state, where more premium comes into NFIP than is paid out by the program.

In response to the coming advent of BW-12, federal regulatory agencies have started preparing new rules for financial institutions, including the force-placement of flood insurance.  Private insurers have begun expressing interest in selling flood insurance not backed by NFIP.  Notably, NFIP was originally passed to meet a flood insurance need that private insurers were not meeting due to unprofitability.  The Florida Office of Insurance Regulation has responded to this renewed interest with an informational memo to assist private insurers in making filings, and Homeowner’s Choice, as well as the Underwriters at Lloyd’s, are now writing flood insurance.

It’s no surprise that this change in the flood insurance system will increase costs for communities built in high-hazard areas, or newly high-hazard areas.  The public outcry against the rising costs of flood insurance resulted in the proposal of October’s Homeowner Flood Insurance Affordability Act of 2013, whose purpose is to delay BW-12 until two years after FEMA concludes its affordability study of BW-12.  Unfortunately for coastal homeowners, Congress adjourned on Thursday without passing the Act, meaning that flood rates will spike when BW-12 takes effect in two weeks.

Others are trying to find alternative solutions to BW-12.  One Congressional-hopeful in Florida has floated the idea of a National Disaster Insurance Program, aiming to lower the costs to those affected by BW-12 by pooling flood risk with the risk associated with natural disasters in other parts of the U.S., like fire or earthquakes.  In October, the Florida Senate Banking and Insurance Committee explored what it would take to opt Florida out of NFIP and handle flood insurance on its own.

With implementation of BW-12 unopposed, how does the act affect your future?  Does Biggert-Waters affect your homeowners policy?  Have you looked into private insurance, or are you an insurer who is thinking of offering flood insurance?  How is your state handling the changes?