81% of flood insurance policyholders will see rate increases, Redfin says

Sergio Flores/Bloomberg

When the Federal Emergency Management Agency rolled out a major overhaul to its beleaguered National Flood Insurance Program last April, it promised that bigger, richer homes would bear the brunt of premium increases, while almost 90 percent of policyholders would see their costs stay stable or decrease.

But as the program goes into effect this month for existing policyholders, more than 80 percent of those homeowners are set to see rates climb and those gains will be spread largely evenly among rich and poor areas, according to a new report from the real estate firm Redfin. The report also found that “Majority-Hispanic” neighborhoods are more likely to see their flood-insurance premiums rise than any other major ethnic or racial neighborhood group, with 84% of policyholders facing increases.

The NFIP serves roughly 3.4 million single-family homes, most of which are in high-risk flood areas. The program was created in 1968 to cover homes that private insurers either didn’t want to cover or would only cover at a relatively high cost. The government offered more modest premiums, but the result is that over time the program has gone broke. It has more than $20 billion in debt, in part because of climate change-related phenomena such as rising sea levels and more storms. Those have led to more widespread flooding, causing more damage than the premiums could cover.

For years, FEMA tried to reform the program to make premiums more reflective of actual costs, but it was unpopular with Congress and constituents. Last year, FEMA rolled out a reform known as Risk Rating 2.0, based on cutting-edge science and modeling techniques. The new program aims to be more equitable by setting rates based on the risk of individual homes, as opposed to the risk of all the homes in one risk zone as the old method did. The idea is the new system would charge higher premiums for the riskiest homes, while many of the other homes in the program would actually see lower premiums. FEMA also said that rates would be no more that 18% per year and be capped at $12,000 total. It also said that mostly expensive homes would bear the brunt of the premium increases.

FEMA wouldn’t comment specifically on Redfin’s findings. “FEMA hasn’t provided any Risk Rating 2.0 premium information to outside entities, and any attempt to compare an outside entity’s premium estimates to Risk Rating 2.0 is simply speculation,” the agency wrote in an email.

Sheharyar Bokhari, a senior economist at Redfin who did the research for the report, acknowledged that FEMA didn’t release any individual home data, but said the agency is releasing zip-code level data on the share of policyholders that will see rate increases. Redfin analyzed this data along with census data on income and ethnicity in zip codes to derive its findings.

In Texas and Florida, about 90% of homeowners will be subject to increases, the analysis found. Premiums have been well below the national average in those states, despite the fact that they have experienced a disproportionate amount of devastating flooding from hurricanes. The increases will disproportionately affect zip codes with high Hispanic populations.

“That’s likely because Texas and Florida — the states hit hardest by FEMA’s overhaul — have the largest Hispanic populations behind California,” the report noted.

Redfin found that 76% of policyholders in neighborhoods with the highest earners are seeing premiums rise. That’s just below the national average, which is the 81% of policyholders overall who are about to see rate hikes.

One reason for the difference between Redfin’s finding and FEMA’s promises may be semantics. FEMA included people whose increase in premium payments will be $10 or less a month as part of its “stable group.”  But Bokhari said that the implications down the road, even for that group, could be substantial rather than “stable” because while FEMA can make rate hikes of only 18% a year, it can do that for up to 15 years or until a policy has reached $12,000. This is something that could really pinch less wealthy people over time, even if they aren’t paying the highest absolute amount in premiums, he said.

“Most policyholders probably won’t feel the burn of FEMA’s price hikes in year one, but by year five or 10, the elevated cost of flood insurance could impact where Americans decide to buy and build homes,” Bokhari said.

Another possibility, is that the FEMA rate hikes may backfire and cause people to cancel policies leaving them vulnerable to financial ruin from floods — essentially the opposite of what FEMA wanted. Only people in designated zones with federally-backed mortgages are required to have flood insurance. And so despite increasing flood risk, FEMA insures fewer people than it did in past years because premiums, while relatively modest, still rose every year for all homeowners regardless of risk and some people dropped coverage. The agency had roughly 3.4 million single-family-home policyholders in 2020, down from 3.8 million a decade earlier.

Since the pandemic, both Florida and Texas have seen populations surge. Many of these people are trying to escape higher tax states and may not be accounting for rising flood insurance costs.

“Some people may choose not to renew their flood insurance policies despite increasing flood risk due to climate change, especially as inflation drives prices up elsewhere in the economy as well,” Bokhari said.