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The cost of flood insurance might make you move

After a decade of storms like Katrina, Rita and Sandy, the National Flood Insurance Program (NFIP) has had to borrow billions from the U.S. Treasury to pay claims.

According to the Casualty Actuarial Society, the NFIP never charged an actuarially sound rate for flood insurance to begin with. More than 30 percent of homeowners have subsidized policies under the program, since they couldn't afford coverage, and many more were undercharged.

Worse, too few property owners even purchase flood insurance, which means a lack of revenue for the NFIP.

Now, add climate change to the NFIP's problems. A recent report commissioned by the Federal Emergency Management Agency (FEMA) raises the question of whether climate change will make the cost of flood insurance unaffordable for most of us by the end of the century -- if not before.

flood insurance costsThe report predicts that because of climate change, for inland areas, the average increase in both river depth and the area in the flood plain are expected to increase by 45 percent by the year 2100. Areas classified as part of a flood plain would increase by over 100 percent for portions of the Gulf of Mexico and the Atlantic coasts, and up to 50 percent along the Pacific Coast.

Here comes the water

Susan Pino, a director for actuarial, risk and advanced analytics at Deloitte Consulting, explains that modeling shows three things happening:

  • The Special Flood Hazard Area (SFHA) will get larger in general.
  • There will be more discharge, precipitation and flooding.
  • Base flood depth will increase.

"Policies are likely to cost more because of the flood plain depth, so there will be more damage, floods will be more severe, and they will be deeper in the structures. So that's why climate change might cause the actual cost of the damages to go up. FEMA has to follow suit and raise the premiums," says Pino.

Long story short: There will be a huge increase in the number of homes that will be rezoned as being in flood plains and will therefore require flood insurance. Scores of homeowners will have to pay significantly more for the flood insurance they already have, or be required to obtain it once their homes are rezoned.

"Over the last 10 years, flood insurance has become unattainable for the majority of the homeowners living in coastal areas," says Ashley M. Hunter, a broker with HM Risk Group, a brokerage in Austin, Texas. A lot of that may have to do with how historical data will be less reliable, since climate change changes future storms.

"Historically [the NFIP] tried to make the rates as representative as possible to what they think the losses will be, but remember in actuarial science, they are always looking back to predict the future and when something changes that, like climate change, it becomes a lot more difficult," says Pino.

How climate change affects flooding -- and flood insurance

A 2007 study titled "Coastal Flooding in the Northeastern United States due to Climate Change" found one impact of climate change is an increase in sea level because of melting ice on land and thermal expansion of the ocean.

The effects of sea levels rising in coastal zones include:

  • Displacement and loss of wetlands.
  • Inundation of low-lying property.
  • Increased erosion of the shoreline.
  • Expanding flood zones.
  • Changing water circulation patterns.
  • More salt water intrusion into groundwater and estuaries.
  • Changes in coastal hurricane storm patterns that alter the frequency and intensity of coastal flooding.

Insurance rates up, property value down

Critics think flood insurance may always be unaffordable for some as it is now, but not simply due to climate change. Floods may never be a common enough occurrence to swing the actuarial pendulum into the unaffordable zone.

"Even if actuarially significant, flood plains will not look appreciably different than they do now," says Rob Drury, executive director of the Association of Christian Financial Advisors, the nation's largest nonprofit network of financial professionals. "Flood plains may expand, the cost of insuring them may rise, and on rare occasions new ones will be created, but certainly average costs will not increase enough to make protecting properties entirely unaffordable."

Drury thinks if the cost of insuring a property increases by as much as 50 percent, the resulting decrease in the property's value would offset much of the increase in premium.

"Certainly the indication is that the losses will be larger and so one would presume that the rates would go up as a result of that," says Pino.

Beyond the affordability issue, people may simply grow tired of contending with water damage. People who live in river and coastal areas that gradually become more prone to flooding will likely end up moving. For homes that are damaged by floods, it may be impossible to rebuild in the same place due to the exorbitant costs and newer flood plain guidelines. But also, homeowners may simply choose to live outside a flood zone.

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