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Flood Insurance Costs Vastly Underrated by FEMA, New Report Says

Published in 24 February, 2021

At a Glance

  • A new report takes into account the cost of damage.

  • FEMA doesn’t currently factor that in to flood insurance premiums.

  • The fee structure for the federal flood insurance program is set to change this year.

Hundreds of thousands of homeowners across the U.S. would pay considerably more in federal subsidized flood insurance if rates accurately reflected the risk, according to a new report from research group First Street Foundation.

The report comes at the same time the Federal Emergency Management Agency is working to revise premiums for the National Flood Insurance Program. FEMA says the new premiums will be more in line with real-life costs.

If the First Street data is any indication, that could mean rates more than five times higher than what they currently are.

First Street, a nonprofit research and technology group, identified 4.3 million residential properties as having substantial flood risk that would result in damage and financial losses.

Under current FEMA rules, flood insurance rates are based mostly on whether or not a property is within a designated Special Flood Hazard Area, which requires flood insurance if a homeowner has a federally backed mortgage. The rates don’t take into account a home’s value, estimated cost of damages in the event of a flood and other factors, according to Matthew Eby, founder and executive director of First Street.

That means the cost of flood insurance for a $300,000 home could be the same as for a million-dollar home.

“The rates are really low for some properties that have substantial risk,” Eby told weather.com in a recent interview. “And the reason for that is because FEMA does a zone-based approach to flood risk.”

The foundation calculated annual estimated losses over a 30-year-period to determine what homeowners should be paying for flood insurance. About 2.7 million of the properties identified by First Street are outside of an SFHA. The foundation estimates that under the current system, flood insurance costs would need to increase by 5.2 times, which would bring annual premiums up to about $2,484 a year. Those inside an SFHA would face premium increases of 4.2 times, costing $7,895 a year.

Costs would vary once other factors are thrown into the mix.

And the prices would go up as climate change increases costs and makes flooding more likely, according to the report. The total expected loss from flooding this year is $20 billion. But that goes up to nearly $32.2 billion in 30 years.

FEMA is expected to raise rates for flood insurance on Oct. 1. The agency says people should not assume that the First Street estimates are the same as the new NFIP rate structure, called Risk Rating 2.0

“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,” David I. Maurstad, who runs the flood insurance program for FEMA, said in a statement, according to the New York Times.

The NFIP is operating under a loss of more than $36 billion, according to First Street.

First Street introduced a new tool last year called Flood Factor, which is an interactive website that lets people look up flood risk by address. As part of its new report, the foundation added estimated costs of flood damage and losses over the course of 30 years to the tool.

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