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Could flood insurance issues prompt housing meltdown?

Property and Casualty Insurance
by Glenn Tobleman

The housing crisis was a major contributor to the overall economic meltdown seen more than a decade ago, and while there have long been fears of growing housing bubbles, experts say a burst is unlikely. However, a different stumbling block for the sector may be forming these days, as more homeowners face sharply rising flood insurance policy premiums that could leave them in serious financial peril.

Many people may associate high flood insurance premiums with regions at high risk for hurricanes and rivers overflowing, such as Florida and regions around the Mississippi River. But according to Vox.com, officials in New York City are also concerned with changing rules under the National Flood Insurance Program would mean for many homeowners there. For instance, in the Brooklyn neighborhood of Canarsie - a heavily minority homeowner community - current premiums for such coverage costs about $600 per year on average, but that number could rise to anywhere from $3,000 to $6,000 by 2022.

More problematically, it's possible that having such coverage could become mandatory for significantly more homeowners as revised flood maps are released, the report said. Where only about 40 of the 12,000 buildings in Canarsie are currently considered to be at high risk for flooding, the number could rise to more than 5,000, meaning even more homeowners would have to face these steep premiums. Officials believe many homeowners would be at significantly greater risk for foreclosure if these changes came to pass.

Flooding is a very real concern for many, but coverage can be too expensive to afford.Flooding is a very real concern for many, but coverage can be too expensive to afford.

Why it's a growing issue
If these issues arise, that could trigger people nationwide - not just in New York City - to face foreclosure as well. Elizabeth Malone, an insurance specialist at Neighborhood Housing Services of Brooklyn, told New York City public radio station WNYC that the only way people are going to be able to keep their Canarsie homes in the years ahead is if flood insurance remains affordable; in Canarsie, an increase to $6,000 per year for coverage would constitute more than 8% of the neighborhood's median household income.

While rising sea levels put many coastal neighborhoods (where underwater mortgages may be more common than regional averages to begin with) at greater risk, the cost of flood insurance could push many owners over the edge and force them out of their homes. And that would happen long before high tides began to seriously affect those properties on a daily basis.

Other parts of the country
Meanwhile, homeowners in Texas who received emergency flood insurance in the wake of Hurricane Harvey in 2017 will soon see that coverage expire, according to Beaumont television station KFDM. More than 6,700 homeowners across the Lone Star State received Group Flood Insurance Policies in August 2017, but those are set to expire on Oct. 24, meaning many people who did not have flood insurance prior to the storm will now have to figure out how they're going to proceed once again.

For homeowners who received a GFIP policy but opt not to carry standard flood insurance going forward, they may be at significant financial risk if another major disaster involving flooding affects their properties, and would likely not receive additional federal assistance. However, as the cost of those premiums can stretch into the thousands of dollars per year, it may be quite difficult for many owners to afford, posing a potentially dangerous financial threat no matter what they choose.

Is private insurance the answer for homeowners?
Increasingly, private insurance companies are moving to offer flood coverage in addition to what's available through the NFIP; these offerings are proving popular in Florida, according to the Tampa Bay Times. Since 1 in every 3 NFIP enrollees resides in the Sunshine State, private insurers are finding some traction there as well.

The most recent data from the Florida Office of Insurance Regulation shows that about 83,000 private flood insurance policies are in effect there, up from fewer than 1,000 in 2015, but that number pales in comparison with the 1.76 million policies underwritten by the NFIP as of the end of 2018. As such, industry experts largely see private insurance as a supplement to NFIP coverage, rather than a replacement for it, but for those who can afford the extra premiums on top of what they already pay, there's a lot of value to be had.

However, private insurers can also offer more precise risk assessments for individual homes, potentially meaning homeowners can find more affordable coverage as an alternative, but that should be taken on a case-by-case basis.

With all these issues in mind, the property and casualty insurance industry overall may need to look for innovative ways to make flood insurance more affordable. Risk is obviously on the rise due to climate factors beyond anyone's control, but if homeowners can't afford required coverage, they may face financial ruin, which is bad for the economy writ large.

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