Ratepayers to the financially troubled National Flood Insurance Program, which underwrites homes in flood-prone communities up and down the South Carolina coast, could soon see drastically different costs.
A report in Bloomberg News published Tuesday detailed the Federal Emergency Management Agency's new framework for determining rates, dubbed "Risk Rating 2.0."
The program, according to a leaked document and several people familiar who spoke to Bloomberg anonymously, would incorporate more detailed, private-sector data into the determination of flood risk.
FEMA's flood zone maps, which are often outdated before they're even finalized, are the primary tool that determines rates currently. Homeowners for different properties in the same flood zone pay relatively similar rates. Under Risk Rating 2.0, a home at the edge of a 100-year floodplain might see a more than 50 percent reduction in rates, while a more vulnerable home in the same zone could see rates double, according to Bloomberg.
"While our current system accounts for a single flood hazard, our new system will determine a customer’s flood risk by incorporating multiple, logical rating variables like different types of flood, the distance a building is from the coast or another water source and the cost to rebuild a home or building," David Maurstad, chief executive of the NFIP, said in an email statement to The Post and Courier.
FEMA officials are expected to announce more detail on the new risk determination program next week. It's the biggest attempt in at least seven years at reforming the NFIP, which has struggled to stay solvent since Hurricane Katrina in 2005 and is now tens of billions of dollars in debt.
Regular homeowner's insurance does not cover flooding because it's a particularly expensive type of disaster to insure. A fire might hit only one house on a street, but if a flood comes, it inevitably covers a large area, setting up an insurer to pay out many claims at once.
That's a challenge to the very idea of insurance: spreading out cost among many ratepayers so that the pool of money produced can cover claims that occur sporadically, or in relatively low numbers.
At the same time, the NFIP has proved a massively important financial safety net for homeowners, said Samatha Medlock, of international insurance and risk assessment group Willis Towers Watson.
After a severe storm, a property owner relying purely on disaster assistance receives an average of $4,000 in aid, Medlock said; a flood-insured owner receives an average $110,000.
"Which survivor do you want to be?" she said.
The Lowcountry is particularly dependent on the federal flood program. Since 1978, two-thirds of the NFIP claims in South Carolina have come from Charleston.
“Over time ... the flood insurance program, since it’s subsidized, has been an incentive to build in places that didn’t make a lot of sense,” Charleston Mayor John Tecklenburg said. “For the program to reflect reality also is somewhat in concert with our thinking about land use: that you shouldn't be building in places where it floods a lot.”
There are some components of the program that help communities avoid flood risk, however. The maps themselves are an important tool for considering building rules and growth patterns, Medlock said.
Local governments can also lower rates for people in their communities through the Community Rating System, which offers breaks in exchange for regulations aimed at avoiding flood damage, like requiring that vulnerable homes be built higher.
FEMA officials did not respond to a question on how the new program might affect that incentive system.
Changes to the flood program, while typically aimed at improving its finances, often face a politically difficult path after they're enacted. A reform passed in 2012 proved a shock to local homeowners when it went into effect the following year. Skyrocketing rates put some in the position of not being able to afford the required insurance as they suddenly found it difficult to sell their homes.
Representatives of the Lowcountry said they'll be watching closely as FEMA rolls out Risk Rating 2.0.
"While I welcome efforts to modernize NFIP, we must ensure that the burden of that effort is not placed solely on low and middle income families through premium increases," Rep. Joe Cunningham, D-Charleston, said in a statement.
Republican Sen. Tim Scott, who has previously sold flood insurance, said that the best way to help the program become sustainable is to create a rate structure that encourages more people to buy NFIP policies. Another important strategy: finding properties that flood most often and buying them out, so they don't continue to produce claims.
"When you spike the rates in the areas where people are willing to buy the policies, you likely reduce the number of policies sold, which only puts in more jeopardy or greater jeopardy the entire program," Scott said.