The Biggert-Waters Flood Insurance Reform Act of 2012

In 2012, Congress passed a law to reform the National Flood Insurance Program (NFIP) to make the program self-supporting without federal subsidies. Specifically, the law called for local flood maps to be updated.  Existing subsidies and discounts would be phased out. New rates which would reflect the actual risk from flooding would be established and implemented over five years. Additionally, the new law allows for higher policy limits. 

In the past, certain property owners in high risk areas known as special hazard flood zones have been charged premiums that do not reflect the full flood risk. Further, only properties known as “pre-FIRM”, meaning the property was built before the community adopted its first flood insurance rate map (FIRM) (1971), were eligible for subsidies unless they underwent substantial improvements post-FIRM. Currently, nearly 20 percent of NFIP policies are subsidized throughout the nation. In Florida, a hurricane prone region, the percent is much higher.

While the total effect of the new law remains to be seen, many Floridians and their businesses are expected to experience substantial increases in their flood insurance rates. Properties affected by the new law include:

• Non-primary residences;

• Businesses (those that produce income, used as office or retail space, wholesale, hospitality or similar uses);

• Federal, state and locally-designated historic structures (commercial and residential)  that are not primary residences;

• Properties with one to four residences;

• Multi-family properties (Five or more units);

• New policies after July 6, 2012; and

• Lapsed pre-FIRM policies on or after October 4, 2012.

 Subsidized premiums for primary residences in Special Flood Hazard Areas will be able to keep their subsidized rates unless or until:

• The property is sold;

• The policy lapses;

• The insured property suffers severe, repeated flood losses where the owner refuses an offer to mitigate; or

• A new policy is purchased.

State of Florida Reaction 

Dismayed by the effect the law would have on their constituents, Florida legislators called on the Office of Insurance Regulation (OIR) to provide an overview of the effect the new law would have on Floridians. 

Currently, Florida policies make up 37 percent of the total policies in the NFIP (more than two million policies). Of those, 87 percent (1.78 million policies) have nonsubsidized rates. Thirteen percent (268,500) have subsidized rates. Those Floridians holding the 268,500 policies will see significant increases in their premiums when the law takes full effect. Below is a further categorization of the subsidized Florida NFIP policies:

The Florida Senate Committee on Banking and Insurance met in November to hear from businesses and homeowners on the law’s effect. Florida realtors testified that the anticipated end of the federal flood insurance subsidies could devastate the state’s economy. As a stop gap measure, Florida legislators have called upon Congress to postpone implementation of the new law. However, committee members seemed most interested in changing current regulations to give private insurers more flexibility in offering flood coverage.

Florida Regulatory Action   

An informational memorandum was distributed to insurers by the Florida Office of Insurance Regulation (OIR) to assist those insurers exploring the feasibility of writing primary flood coverage in the state. The memorandum provided a review of the federal and state requirements that would affect issuing private flood coverage and provided suggestions to assist with the state filing process.

In December, Sen. Jeff Brandes (R-St. Petersburg) and Rep. Larry Ahern (R-St. Petersburg) filed legislation designed to encourage private insurers to enter the Florida market. Specifically, the bills would:

• Authorize a private flood insurance policy to be written with multiple options for minimum coverage in differing categories such as

• Deductibles of any range of agreed upon value between the insured and insurer;

• Using either the replacement cost value, or actual cash value of the insured property that is to be replaced or repaired;

• Restricting coverage to the principal structure on a property if multiple structures exist;

• Coverage amounts as low as the outstanding balance of the property’s mortgage;

• Allowing exclusion of contents coverage, additional living coverage, and ordinance/law coverage; and

• Allowing for surplus lines insurers to export policies without the three declamations required in current law.

The legislation would also:

• Add an expert in floodplain modeling to the Hurricane Loss Modeling Commission and allow the Commission to review floodplain models used in private flood insurance;

• Provide flexibility in how private insurers reach their actuarial models regarding flood loss. Retain the authority of OIR to review and approve flood insurance rates.

• Allow rates to be set through the established individual risk rate setting in current law

• Ensure that the insured retains the right to choose a rating method agreed upon between the insurer and the insured that is not reviewed by the OIR after explicit consent

• Require flood insurers to submit a Plan of Operations and Financial Protections and applicable revisions to plans as required by the OIR for solvency, unless the insurer maintains a $35 million surplus.