Rebecca Elliott is a Ph.D. candidate in sociology at UC Berkeley. Her dissertation examines the financial consequences of natural disasters and ongoing efforts to price risk. The project focuses on how national changes to flood risk and insurance are affecting New York City, where Rebecca conducts her fieldwork.
For those looking for more information and assistance on managing personal insurance issues, here are two good places to start:
Touro Law Center's Disaster Relief Clinic
Flood Insurance Sagas, Part 4: So, How Is My Bill Calculated?
In this fourth installment, Rebecca Elliott, our Zone A New York Flood Insurance Expert, provides clarification on the technical details of the National Flood Insurance Program, explaning to homeowners exactly what are the factors that determine the price of insurance premiums, and revealing just how many of them homeowners have direct control over.
by Rebecca Elliott
How is my flood insurance premium calculated?
All of the recent changes in and controversy surrounding flood insurance may have you wondering how your flood insurance premium is calculated to begin with. Why am I paying $1000 on my home, while my friends a few blocks over pay $700? Or $1700? In principle, the price of your yearly flood insurance premium is meant to reflect the flood risk facing your property: higher risk, higher insurance premiums. But there are a few additional factors that can impact your premium rates, leading you to pay less than a “true risk” or “actuarial” rate. This installment will explain how premium rates are calculated in general.
Where you are determines what you pay.
FEMA generates and updates flood zone maps for the entire country (more on this process in a later post). These Flood Insurance Rate Maps (FIRMs) depict the floodplain, what the NFIP calls “special flood hazard areas” (SFHAs). These are the areas required to carry flood insurance. If your property is in an SFHA, the three key components of your flood insurance premium are 1) the type of flood zone you’re in, 2) your base flood elevation (BFE), and 3) the type of structure. First, here are the types of SFHAs:
- A zone: this is an area subject to flooding by the 1-percent-annual-chance flood event. This is sometimes called the “100 year flood,” but this is misleading. The NFIP is referring here to a statistical probability of a flood occurring every year, not the time between events. On average, this type of flood event will occur once every 100 years, but the number of such events that actually occur every 10, 20, or 50 years is highly variable. Also, “100 year flood” sounds pretty epic, so people tend to think it refers to only really devastating flooding but, in fact, this can apply to a wide range of flooding events. Note also that “A” refers to a broad class, including AE, A1 through A30, etc. If it starts with “A”, it’s an A zone. The different sub-classes refer to differences in topography (i.e. how steep the land is), and so forth.
“Moderate” or “minimal” flood hazard areas are labeled Zone B, Zone C, or Zone X and are also shown on the FIRMs. Properties in these areas often qualify for “preferred risk rates.” Though they are not required to carry flood insurance, property owners here can purchase coverage at favorable rates. Below is a helpful graphic from FEMA Region II (which includes New York):
Second, how high the lowest livable floor of your property is relative to the base flood elevation (BFE) factors into your insurance premiums. The BFE is the height the flood water is expected to rise during a typical flood event. The BFE also serves as a regulatory requirement for elevating or flood-proofing your property. Communities often also choose in include “freeboard” in setting building codes; this is an additional foot or two above the BFE that accounts for the many unknown factors that could contribute to flood heights greater than the BFE. The graphic below from FEMA helps clarify the relationship between BFE and premiums; the precise dollar figures may not be accurate for your situation, but you get the idea: if you’re paying an actuarial rate, the higher you are relative to the BFE, the lower your insurance premiums.
The insurance premium rate depends on these broad “risk classes,” which are nationally standardized, meaning, for example, that an A30 building located in Mississippi will pay the same as an A30 building in New York, provided they have the same coverage details and elevation rating relative to the BFE.
Where can you find your flood zone and BFE? New York City maps are viewable online, through a tool created by FEMA Region II, available here. You can insert your address and get
your BFE requirements here. The elevation of your property relative to the BFE is established through something called an “elevation certificate.” If you are paying an actuarial rate, your property should have an elevation certificate already. If you need or want one, many surveyors can provide this service-- just be sure they are familiar with NFIP requirements.
Third, the type of structure matters. This refers to whether the property is residential or non-residential; homes get different insurance policies than businesses do. The design and age of the structure can also factor in.
Non-actuarial premium rates: when where you are does not determine how much you pay.
The legislation that established the National Flood Insurance Program (NFIP) in 1968 allowed for two basic types of premium rates: 1) “risk premium,” “full-risk,” or “actuarial” rates, and 2) “other than risk premium,” “discounted,” or “subsidized” rates. The existence of these discounted rates is part of what makes the NFIP different from a private insurer and much of the reform controversy surrounds what to do with these “artificially low” rates.
The two major types of non-actuarial rates are “pre-FIRM” rates and “grandfathered” rates.
- Pre-FIRM subsidized policies: These are buildings that were built before there was an effective FIRM and flood-related building codes for their area. For New York City, these are buildings built before 1983.
- Grandfathered policies: If your property is subject to a map change, you can continue to pay premiums based on your prior (lower-premium) rate class. For example, if your home was built when your block was part of an A zone, but FEMA remaps 10 years later and calls it a V zone, you get to keep your A zone rate.
Biggert-Waters was meant to convert these non-actuarial rates to actuarial ones through 25 percent annual increases. The recently enacted Homeowner Flood Insurance Affordability Act still moves non-actuarial premiums in this direction, but at a slower rate, while also reinstating grandfathering. These changes are especially important for New York City because of its older housing stock: 85 percent of buildings in the latest FIRMs were built before 1983, meaning lots of home and business owners are paying non-actuarial rates, and should expect increases in the years to come.
What else affects my insurance premium?
It doesn’t have to fall on your shoulders alone to mitigate your flood risk and keep your flood insurance affordable. If your community takes steps to protect itself from flood events, such as levee construction, dune replenishment, and wetlands preservation, FEMA will reflect this in premium rates for the area. Advocacy for community-level flood resilience will become increasingly important as sea levels rise.
What you opt to purchase also affects your flood insurance premium. You can choose your coverage limit (up to $250,000 for a home), as well as how much to insure the contents of your home for (up to $100,000). Keep in mind that insurance agents are trying to sell you a product; they may find ways to keep your premium lower and therefore competitive by skimping on coverage you might really need.
Why are there non-actuarial premium rates to begin with?
The original goal of discounted rates was to encourage participation in the program, which was completely voluntary before the mandatory purchase requirement (i.e. if you have a mortgage, your lender requires you to have flood insurance) was added in 1973. In particular, the program did not want to penalize property owners whose homes and businesses were built before there was an effective FIRM for their area. Program-wide, about 20 percent of policies in force have discounted rates. Insurance experts say the existence of this 20 percent makes the program financially unsound at a structural level; it’s almost designed to go broke. So why would policymakers have designed this into the program in the first place? From the point of view of the federal government in the 1960s, the most pressing issue was massive outlays of disaster relief following floods, which are the most common and destructive natural disaster in the U.S. Getting property owners to prefund even a part of that damage-- even if their rates wouldn’t fully cover all of it-- represented at least some savings to the government and the taxpayer at large. The expectation was that these older, flood-prone buildings would “naturally” disappear from the program, as people left the floodplain following disasters. This has not really happened, however, meaning that the discounts have persisted and have generated some of the more recent problems facing the NFIP.
What can I do to keep my premiums affordable?
The recently enacted Homeowner Flood Insurance Affordability Act provides property owners with more time to elevate or otherwise flood-proof their homes and businesses. Bringing your property up to code, or even beyond, will generate long term savings as premiums increase, not to mention the fact that this is the only way to preserve your physical safety and financial security in the event of future flooding. The culminating installment in this series will serve to guide you, as a homeowner, on the actions you can take to lessen your flood risk and keep your family safe and insurance premiums under control.