Flood insurance costs key factor in Coast recovery

Mississippi Business Journal, The, Jan 14, 2008 by Gillette, Becky

Problems with insurance cost and availability have been identified as the number one barrier to the rebuilding of the Mississippi Gulf Coast following Hurricane Katrina. But while most private carriers are no longer writing wind coverage, leaving expensive insurance from the state's Wind Pool underwriting association as the only option, rates for flood insurance have remained a bargain.

However, some areas of the Coast are now subject to higher rates for flood insurance because they are in a high hazard area. In this interview with the Mississippi Business Journal, Butch Kinerney, chief of communications, FEMA Mitigation Directorate in Washington, D.C., answers questions from the Mississippi Business Journal concerning flood insurance issues on the Coast.

MBJ: Have flood insurance rates increased on the Gulf Coast?

Kinerney: Flood insurance rates are set nationally and any adjustments are made in May. Congress caps the maximum flood insurance rate increase at 10% in any year. In each of the past few years, the rate increase has averaged about 4%. That includes rate changes in all categories of flood insurance coverage, but changes are national - not regionally or geographically specific.

MBJ: Are those rate increases only for new construction?

Kinerney: Flood insurance rates are based on risk. There are several primary rate categories for residential as well as non-residential (commercial) flood insurance policies:

1) The first is the low- to moderate-risk policy for those who wish to insure property outside of a Special Flood Hazard Area (SFHA). Included in this category of flood insurance policies is a specialty policy known as a "Preferred Risk Policy" for a structure with no prior floor insurance claims.

2) The second major class of policies is the high-risk policy for those who want to insure buildings and/or contents located inside a Special Flood Hazard Area. This category includes policies written in Coastal High Hazard Zones.

Rates are then calculated based on amount of insurance purchased, location of structure or contents being insured, age of structure, building occupancy, building design and - for buildings in Special Flood Hazard Areas - elevation of the building in relation to the base flood elevation, which has been adopted by the local community.

Rate changes are based on actuarial studies which consider all of the above-mentioned criteria.

MBJ: Are flood insurance rates higher that before the storm in a flood area even if you build to the new recommended elevation levels?

Kinerney: Flood insurance rate changes are not based on the storm history of a given area. However, the flood risk of certain properties may be reanalyzed following a significant flood event, including a hurricane, which could lead to a change in the flood insurance study for the area. For example, if, following a major flood event, a community adopts new Flood Insurance Rate Maps (FIRMs)adding new areas to a Special Flood Hazard Area based on relevant new information, buildings in those newly added areas would see higher rates because of the risk change.

In the case of coastal Mississippi, a new study was already underway when Hurricane Katrina hit. After the storm, FEMA, state and local officials agreed that the study needed to be revised to take Katrina into account. That new study and the accompanying preliminary flood insurance rate maps were released for review in December, with a public comment period beginning in mid-January.

New construction or substantially-improved buildings are rated based on the FIRMs in effect at the time of construction or substantial improvement. The flood insurance rates are actuarial - in other words, rated based on the flood risk. Therefore, the higher the building's lowest floor is elevated above the required base flood elevation, the better the flood insurance rate will be and the lower the flood insurance premium will be because of the reduced flood risk. An elevated building located in a designated SFHA is still considered to be in the Special Flood Hazard Area, even though its lowest floor may be elevated to or above the base flood elevation. If any portion of the building, including its foundation is below the BFE (Basic Flood Elevation), then the building is considered to be in the SFHA.

MBJ: Is it important to discourage new construction in the highest hazard areas?

Kinerney: Communities must weigh a number of factors when deciding the best places for development and construction. Flood risk should certainly be a major part of that equation. And while FEMA encourages communities to prohibit construction in high hazard areas, FEMA also respects a community's right to govern itself. So, if a decision is made by local officials to allow construction in a higher-hazard area, FEMA provides a number of tools to assist a community in ensuring that construction limits the risk as much as possible. For example, FEMA offers technical advice to communities on engineering designs which allow buildings to be elevated beyond the one-percent annual chance base flood elevation.