Flood insurance premiums could rise and property values fall in the most deluge-prone areas under a plan the Trump administration intends to roll out in coming weeks to change the way risk is calculated under the National Flood Insurance Program.
Instead of simply focusing on whether a home is inside or outside of the 100-year flood plain, the Federal Emergency Management Agency plans to use private-sector data to calculate the real flood threat for each home and set costs based on that data, according to people familiar with the effort and a briefing document obtained by Bloomberg.
Samantha Medlock, North America head of capital, science and policy at insurance broker Willis Towers Watson, said the change "could be the first major advancement to improve understanding of flood risk since the creation of the NFIP itself."
The change could also hurt communities with the greatest flood risk. The new policy "is certainly an issue of concern and one we are actively tracking and engaged on," Liz Thompson, spokeswoman for the National Association of Home Builders, said in an email.
The overwhelming majority of American households with flood coverage receive their policies through the National Flood Insurance Program, which covered about 5 million policyholders in 2017. Despite the growing risk of flooding due to climate change, the number of policies under the program has fallen about 10 percent from its peak in 2009.
Flood insurance will get fresh attention this week from Congress. On Wednesday, the House Committee on Financial Services is set to hold a hearing on reauthorizing the NFIP.
Lawmakers have struggled to reform the program. In 2012, Congress passed changes that would impose premiums that reflected the full risk for homes, only to back down two years later in the face of intense public opposition.
FEMA, asked to comment on its plans, offered a statement by David Maurstad, deputy associate administrator for insurance and mitigation, who said the new system "will help customers better understand their flood risk and provide them with more accurate rates based on their unique risk."
The initiative, which FEMA calls Risk Rating 2.0, comes as climate change places growing pressure on the publicly subsidized flood insurance program. Claims often outpace premiums, saddling the program with a debt that topped $30 billion in 2017. The models that determine those rates ignore certain kinds of flooding, such as intense rainfall. And many Americans at risk of flooding nonetheless don't buy insurance.
The new system is designed to address some of those problems. The agency plans to pair its existing mapping data with "commercial catastrophe models," as well as the "geographic and structural characteristics" of the home, according to a briefing document presented by FEMA to private flood insurance representatives in October and obtained by Bloomberg.
The goal, according to that document, is more transparent and understandable costs, which will in turn spur more people to get flood protection.
"Policies that are easier to sell and buy = more insurance coverage," the document says.
The document offers the example of two homes in a 100-year flood plain. The first home, at the edge of that zone, faces low risk of flooding from inland flooding or storm surge; the second faces higher risk from both. Under the current system, each home pays the same premium; with the changes, the first home's premiums would fall by 57 percent, while premiums for the second home would more than double.
The same document, dated Oct. 17 2018, said that FEMA would first introduce the new risk rating system for states along the Gulf Coast and Southern Atlantic, from Texas to North Carolina. New rates would begin to take effect in 2020.
A FEMA spokeswoman said parts of the document were no longer accurate, but declined to say which ones.
"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, or the cost to rebuild a home," Maurstad said.
The agency said it didn't yet know what the effect of the new system would be on premiums. But rates are likely to go up in neighborhoods with the greatest exposure to flood risks, which could hurt property values in those areas, according to Michael Berman, a former chairman of the Mortgage Bankers Association who worked on housing issues for the Obama administration and has been briefed on the plan.
Still, Berman said the initiative was an important one. "Anything that they can do to improve people's understanding of flood risk compared to binary 100-year flood plain is good for consumers and good for investors in the long run, even if it raises premiums," he said.
Increasing the cost of flood insurance tends to depress home values for two reasons, according to Asaf Bernstein, an economist at the University of Colorado at Boulder whose research includes asset pricing and household finance. Not only do higher premiums raise the cost of owning a home; they also act as a warning to potential buyers about the likelihood that a house will flood.
R.J. Lehmann, director of insurance policy at the R Street Institute, which advocates for market-based solutions to climate change, said that even if FEMA's new approach caused home values to fall in some areas, the shift was necessary.
"Adapting to climate change is never going to be a cost-free exercise," Lehmann said in a phone interview. "We absolutely need a more granular and more updated look at what flood risk is."
A spokesman for the National Association of Realtors, Wesley Shaw, declined to comment on what the change could mean for homes values in areas with the greatest flood risk.
"We need to wait and see what FEMA comes out with before we can evaluate the market impact," Shaw said by email. "We welcome FEMA's efforts to modernize and improve the fairness of its ratings methods."
FEMA said the way the law is written on flood insurance gives it the authority to change the way it sets rates without action from Congress. The agency said it hadn't yet decided when the new rates would take effect, and how quickly.
"We will take an agile approach to share information transparently about the release of this new system with all stakeholders," Maurstad said.