Rising Cost of Flood Insurance Will Create Serious Challenges for New York City
October 25, 2013
Some New York City residents may soon face sharp increases in their flood insurance premiums as a result of major changes occurring in the National Flood Insurance Program and the redrawing of flood maps that expand the areas at risk, according to a new RAND Corporation study.
Property owners in areas now deemed at highest risk may face increases of $5,000 to $10,000 annually for their flood insurance, a change that could lower property values, create economic hardship for homeowners, and increase foreclosures and short-sales, according to the study.
Landlords most likely will bear the largest burden of increased flood insurance premiums in the near term as two-thirds of households in the new high-risk areas are renters.
“The new, more accurate flood maps and reforms to the National Flood Insurance Program will mean that many more structures will be in the high-risk flood areas and that premiums will in many cases increase substantially,” said Lloyd Dixon, lead author of the report and director of the RAND Center for Catastrophic Risk Management and Compensation. “Flood-insurance take-up in high-risk areas is already spotty, and the higher rates will create financial challenges for many.”
When Hurricane Sandy struck New York City in October 2012, it flooded land in all five boroughs. The storm surge reached nearly 88,700 buildings, more than 300,000 housing units and 23,400 businesses — and also revealed how few residential units carried flood insurance.
The RAND study was requested and funded by the New York City Mayor's Office. The study's initial results provided background data on flood insurance for the city's recent report, “A Stronger, More Resilient New York,” which was released in June 2013. RAND is a nonprofit research organization.
The National Flood Insurance Program is the primary source of flood insurance for homeowners, smaller multiunit residential properties and businesses. Larger businesses typically buy flood insurance in the private market, although they also may buy a National Flood Insurance Program policy to cover the first layer of loss.
The RAND study estimates that roughly 55 percent of the 1- to 4-family homes in the high-risk areas in New York had insurance policies through the National Flood Insurance Program when Hurricane Sandy struck. Approximately three-quarters of the 1- to 4-family homes in the high risk-areas have mortgages and are thus required to have flood insurance under federal law.
About two-thirds of 1- to 4-family structures required to purchase flood insurance do so. Among 1- to 4-family structures not required to buy coverage, the take-up rate is only about 20 percent.
RAND researchers say Hurricane Sandy revealed gaps in the flood insurance system that should be examined in order to improve New York City's resilience to the next event. For residential coverage, the biggest gaps in National Flood Insurance Program coverage were limited basement insurance coverage, even though basements are common, and limited or no coverage for additional living expenses.
For commercial structures, important gaps included limited basement coverage and a lack of coverage for business interruption or business expense, which might be caused by actual flooding or when a building is not useable because it can't be accessed or has no power.
New York City, like other flood-prone regions throughout the country, is experiencing two changes that may make the problem of low flood insurance take-up even more acute. Those are an overdue update of the Federal Emergency Management Agency's Flood Insurance Rate Maps and congressionally mandated reforms to the National Flood Insurance Program embodied in the Biggert-Waters Flood Insurance Reform Act of 2012.
Before Hurricane Sandy, the National Flood Insurance Program was in the process of redrawing outdated flood maps. These maps identify areas with a 1 percent annual chance of flooding as “high risk” areas. There were approximately 35,700 structures in the high-risk areas of New York City's 2007 map, which was based upon flood risk analysis conducted in 1983. The new maps, released in June 2013, reveal an expanded floodplain in New York City that doubles the number of structures in high-risk zones and nearly doubles the number of property owners required to purchase flood insurance.
The Biggert-Waters reforms are designed to phase-out subsidies and grandfathering that allowed property owners to insure their homes at rates corresponding to previous flood maps. The RAND study estimates that although some structures may see little to no increase in the cost of coverage, others may see potential increases ranging from $5,000 to $10,000 a year.
New York City is considering a range of options that could provide some relief from the cost of insurance, including risk mitigation measures and financial assistance for lower-income households. The study identifies a number of steps that should be taken to determine the most promising approaches. Primary among them is the need to develop better information on the elevation of structures in the high-risk areas relative to flood level and the proportion of lower-income households in those areas with the highest premium increases.
The study, “Flood Insurance in New York City Following Hurricane Sandy,” can be found at www.rand.org. Other authors of the report are Noreen Clancy, Bruce Bender, Aaron Kofner, David Manheim and Laura Zakaras.
Research for the study was conducted within the RAND Center for Catastrophic Risk Management and Compensation, part of the RAND Justice, Infrastructure, and Environment research division of the RAND Corporation.
The Center conducts research and seeks to identify policies, strategies, and other measures that have the potential to reduce the adverse social and economic effects of natural and manmade catastrophes by improving incentives to reduce future losses; providing just compensation to those suffering losses while appropriately allocating liability to responsible parties; helping affected individuals, businesses, and communities to recover quickly; and avoiding unnecessary legal, administrative, and other transaction costs.