Watershed moment

Hampton Roads is besieged by hurricanes, nor’easters and full moon tidal surges, but it’s not just coastal Virginia homes and businesses that are threatened by increased flooding.

“Climate change is causing the state as a whole to deal with flooding and flood- related issues. It impacts a lot of people throughout the state,” says Michael Vernon, founder and CEO of Virginia Beach-based Flood Insurance Hampton Roads.

That’s because there are “more ‘rain bombs’ [and] more mega-storms,” says Vernon, describing microbursts — narrow columns of sinking air within thunderstorms that cause significant downpours and destructive, tornadolike winds. “These are tremendous flood events caused by rain that didn’t used to happen. Now more and more places are having these rain bombs for two or three days in a row. It’s becoming a statewide issue.”

Flood-related disasters in the United States have accounted for more than $850 billion in damage and losses since 2000, according to The Pew Charitable Trusts, which provides data on conservation science and other issues.

While flooding is a common, expensive natural disaster, many people don’t realize that flood damage is not covered by a standard homeowners’ insurance policy, says Cate Deventer, associate writer for Bankrate, an online publisher of personal finance content. In Virginia, only 3% of homeowners report having flood insurance, compared with 27% nationally, Deventer says, citing the Insurance Information Institute.

“We do get a lot of clients who are shocked by the cost,” says Will Faddis, marketing manager at Trustpoint Insurance LLC in Roanoke. “Most clients of ours who purchase flood insurance only do so because they are required by [their] lender.”

Most flooding problems in Southwest and Central Virginia are driven by losses to older properties in higher hazard flood areas, Faddis says, because new construction typically is either raised or not located in flood-prone areas.

Federal flood protection

A Federal Emergency Management Agency (FEMA) program provides about $1.3 trillion in coverage for more than 5 million U.S. policyholders. But, over the past 50 years, even as the frequency and cost of flood claims has soared, the National Flood Insurance Program (NFIP) had not adjusted rates and premiums. That’s caused serious solvency problems — the program’s debt to the U.S. Treasury now exceeds
$20 billion.

First Street Foundation, a nonprofit research and technology group, and global commercial engineering firm Arup issued a report early last year warning that nearly 4.3 million residential homes across the country are at risk for substantial flooding that would result in financial loss.

Furthermore, if all of these homes were to be insured against flood risk through the NFIP, rates would need to increase 4.5 times to cover the risk, according to the report.

In late 2021, FEMA took steps to update the NFIP pricing structure, resulting in “Risk Rating 2.0,” which aims to correct inequities in the system that cause some owners with lower-value homes to pay more than they should for policies, while the reverse is true for policyholders with higher-value homes.

However, a group of U.S. senators and congressional representatives from Florida, Louisiana, Maryland, Mississippi, Pennsylvania and New York were not convinced that the new system is an improvement. A month after the first phase of Risk Rating 2.0 was launched in October 2021, they proposed reauthorizing and reforming the NFIP, expressing concerns about possible steep rate increases.

Nancy Ahrens, a vice president of Scott Insurance based in Richmond, says it’s still too early to tell how Risk Rating 2.0 changes are impacting Virginians. “However, flood premiums are rising in most instances on properties where there is an actual flood exposure or past flood loss,” she says.

So far, though, she adds, “Virginia is faring better than the national average under Risk Rating 2.0.”

As of mid-November 2021, 23.2% of flood insurance policies had decreased nationally, while 66% of policies increased by $120 or less a year. But in Virginia, 44.7% of policyholders saw a decrease, and 49% increased by less than $120 a year.

Under Risk Rating 2.0, premiums for policies that cover primary residences cannot increase by more than 18%, and premiums for policies covering other structures are capped at 25%.

Vernon believes that the changes have gotten off to a bad start.

“Basically, they’re using an algorithm that is very different than in the past,” he says. “As a result, changes in premiums are making absolutely no sense.”

For example, the premium price for a house directly on the ocean that is not compliant with flood mitigation requirements is now one-third the premium price of a compliant house, Vernon says. “Suddenly, it’s considered a low-risk property.”

But his biggest complaint is that the new system does not offer homeowners incentives for protecting their property, such as improving lot drainage and installing sump pumps and flood vents that allow floodwaters to flow through garages and crawlspaces.

When property owners are not rewarded for flood mitigation, Vernon says, the result is higher costs — in damages, in lost business and in people moving from the area.

The private route

Flood insurance once was offered by private insurers, but losses stemming from the Great Mississippi Flood of 1927 one of the worst natural disasters in American history at that point, plus other catastrophic floods, put an end to the practice.

In 1968, Congress created the NFIP through the National Flood Insurance Act, and for years, it was the only provider for residential flood insurance.

However, private flood insurance is seeing a resurgence, with private insurers recording $3.1 billion in premiums between 2016 and 2020, with the one-year total of $735 million in 2020 breaking previous records, according to Insurance Journal. As FEMA’s flood program “has fallen farther and farther in debt, it has raised premiums [and] private agents have reengaged,” Vernon explains.

Scott Insurance is seeing more private carriers, like Lloyd’s of London, offering flood insurance policies, Ahrens says, and she expects the private flood market to expand and improve in the future.

“Despite the tougher insurance market, the carriers offering private flood insurance are increasing capacity and continue to compete with and supplement FEMA.” Now, she notes, “We often secure quotes from the NFIP and the private market for our clients in order to determine the best value of coverage.”

Homeowners may find advantages with private flood insurance, Deventer says.

“It can be more comprehensive than NFIP policies, and you might have access to more coverage options and higher policy limits than you do with federally underwritten policies,” she writes in Bankrate Guide to Flood Insurance. Additionally, she says, waiting times for private flood insurance might be shorter than the 30-day period required by the NFIP.

One drawback to private flood policies is that the Federal Housing Administration has not accepted the policies on properties in high-risk flood zones. However, a proposed rule would amend FHA regulations to allow the option to purchase private flood insurance on FHA-insured mortgages for properties located in special flood-hazard areas.

Commercial coverage

Commercial property rates also have been rising over the past few years in response to natural disasters, severe weather events and rising building materials costs.

Another study by First Street Foundation and Arup projected that structural damage from flooding to retail, office and multifamily residential properties will cost $13.5 billion in 2022, increasing to more than $16.9 billion by 2052.

Although the private flood insurance market commonly provides commercial coverage, carriers have grown more sophisticated in determining whether to provide flood insurance for specific locations, “using cutting-edge modeling to more accurately determine whether they have an appetite to provide flood coverage,” Ahrens notes. “Many carriers have cut back their capacity — the amount of insurance they are willing to provide for any one location — to limit their worst-case exposure.”

A traditional NFIP flood policy can provide up to $500,000 for damage to a commercial building, and many national property carriers are spurning flood coverage due to increased severity and frequency of flood losses, Ahrens says.

At the same time, lenders who provide financing for commercial buildings are demanding that the borrower purchase flood coverage, regardless of whether the location is in a FEMA-designated flood zone. Lenders and/or investors “have also put ‘insurance-to-value’ requirements at the forefront, so they are contributing to an increase in demand of higher limits and quality in coverage,” she says.

Flood insurance is adapting to the change in climate. The trend now, Ahrens says, is for agents and brokers to develop “bespoke insurance programs” that involve both the NFIP policies and the private market. The good news is that solutions are available.

Each carrier pays losses for specific locations it insures, Ahrens says. In addition, some flood policies are written to exceed NFIP policy limits.

Faddis believes the private market better protects clients, “given that most NFIP policies max at [$500,000] of building coverage, where private markets can get up to $4 million and higher.”

For strained property owners, the hope is that this trend toward increased reliance on private insurance, as well as efforts to beef up the federal program, will tame the surging costs of flood insurance caused by hurricanes, nor’easters and rain bombs.