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Homeowners could see hike in federal flood insurance premiums

Premiums for many of the 5.6 million American policyholders who participate in the National Flood Insurance Program (NFIP) could rise under proposed federal legislation aimed at overhauling the program.

Supporters hope the proposed reform measure will more fairly set insurance rates for property owners in high- and low-risk flood areas. Under the proposal, new flood maps would be drawn to reflect a property's "true" flood risk and help revise flood insurance rates.

The legislation -- now in draft form -- is being pushed by U.S. Rep. Judy Biggert, R-Ill., who chairs the insurance subcommittee of the U.S. House Financial Services Committee. Biggert's subcommittee began hearings on flood insurance reform March 11, 2011.

Under Biggert's proposed bill, perhaps the most critical change to NFIP would be bumping up the annual limit for premium increases from 10 percent to 20 percent.

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Millions carry flood insurance

According to FEMA, about 5.6 million homes and other properties are covered by flood insurance through NFIP, mostly in Florida and Texas.

Coverage through NFIP does protect policyholders against damage caused by a tsunami, says Michael Barry, vice president of the Insurance Information Institute. That’s of particular interest to residents along the West Coast, which faced tsunami warnings after the devastating March 11, 2011, earthquake in Japan.

The average cost of an NFIP policy for homeowners is $570 a year but can run as low as $129 a year in low-risk areas, according to the Insurance Information Institute. For renters in a moderate- to low-risk area, rates start from $49 a year for contents-only coverage.

Standard homeowner's insurance and renter's insurance policies don't cover flood damage. NFIP provides coverage of up to $250,000 for a flood-damaged home and $100,000 for flood-damaged contents.

NFIP was created in 1968 by Congress through the National Flood Insurance Act. It was designed to allow property owners to buy flood insurance from the federal government as an alternative to federal disaster assistance -- aid that usually comes in the form of a loan. Biggert's proposed bill would order studies to examine taking away the flood insurance program from FEMA and putting it into the hands of the private sector.

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FEMA works with roughly 90 private companies to offer flood insurance; rates do not differ among insurance companies or agents. FEMA keeps the premiums but pays the insurers a fee for collecting the money. Flood insurance is available in more than 20,800 U.S. communities.

“We have long believed that the National Flood Insurance Program is in need of meaningful reforms so that it better serves our customers – the American people,” FEMA spokeswoman Rachel Racusen says.

Debt and debate

NFIP's debt is nearly $18 billion; much of that debt stems from hurricanes Katrina and Rita in 2005.

The federal insurance program is under fire, in part, because the premiums it sets aren't sufficient enough to cover claims. Some policyholders who live in high-risk flood areas do not pay premiums that truly represent the flood risk posed by their properties, critics say.

“For far too long, rates in this program have been set due to political considerations and not actual risk,” says U.S. Rep. Candice Miller, R-Mich., who wants to eliminate NFIP altogether. “Some who live in high-flood-propensity areas have their rates subsidized by others who live in low-risk areas, like Michigan, who are forced to pay higher rates that do not accurately reflect risk.”

Biggert's reform proposal would add optional coverage for living expenses of up to $5,000 and business interruption coverage up to $20,000 per property.

Eli Lehrer, vice president of the Heartland Institute, a nonprofit research and education group, expresses concern about tacking on coverage under NFIP. “This program is already $18.3 billion in debt, and there’s no way of paying it back,” Lehrer said during a March 7 teleconference. “Adding more coverage is a problem.”

Floods wreak havoc

As Flood Safety Awareness Week (March 14-18) approaches, the National Oceanic and Atmospheric Administration (NOAA) is forecasting severe flooding this spring, particularly in the Midwest.

Floods are the nation’s No. 1 natural disaster, causing more than 50 deaths and nearly $1.1 billion worth of property damage in 2009, according to NOAA. That year, flood insurance claims added up to nearly $618 million, with an average payout of almost $27,000, according to FEMA.

Loretta Worters, vice president of the Insurance Information Institute, encourages people living in areas that are prone toward flooding to buy flood insurance.

“Your home is your most valuable asset, and flood insurance is the best and most affordable way to protect that investment,” Worters says.

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