Biggert-Waters Act: The Basics of Rate Increases
*In March 2014, parts of the Biggert-Waters Act were reformed and others were repealed. See Grimm-Waters Basics for the most recent reforms. Please refer to the glossary if there are terms you are unfamiliar with.
The Biggert-Waters Flood Insurance Reform Act of 2012, also known as the Biggert-Waters Act or BW-12, creates a series of changes to the National Flood Insurance Program (NFIP). Among the most significant changes are rate increases for all policyholders, including the elimination of all subsidies and grandfather provisions that have been used for decades. The rate increases put into effect by the Biggert-Waters Act will help to make the NFIP financially sound and reduce the program’s dependence on the Treasury and federal taxpayers.
The NFIP currently owes the Treasury $24 billion, which must be repaid plus interest. Unable to repay its debt since the 2005 hurricane season, the NFIP has not paid any principal on its Treasury loan since 2010. Many experts claimed that prior to Biggert-Waters, the NFIP did not have the capacity to repay the debt in ten years, even if there were no major flooding events.
The most significant increases will be for structures located in high-risk flood zones that were built before the community joined the NFIP, typically between the mid-1970s to 1980s. Unless there have been substantial changes or renovations to the structures, these policyholders have been paying subsidized rates that, in most cases, do not reflect the true risk of flooding. In many cases, these policyholders have been paying rates well below their actuarial rate based on their risk of flooding, meaning that they will see significant increases to their flood insurance premiums as a result of Biggert-Waters.
Other properties that may also be significantly impacted by Biggert-Waters are properties that were built after the community joined the NFIP but that have avoided higher premiums as flood zones have changed, being granted a grandfathered premium rate. Structures are built to code according to the flood zone in which they are located, and if the flood zone has changed and become higher risk, policyholders have historically been allowed to pay flood insurance rates according to the flood zone that was effective at the time of construction (rather than the newer, higher-risk flood zone that would come with higher rates). That provision will be eliminated, meaning all policyholders must eventually pay flood insurance rates according to their current flood zone.
All other policyholders will receive an average of a 10% rate increase. Five percent of the rate increase for all properties will go toward creating a catastrophe fund, so that the NFIP has a pool of money to fall back on in years when losses are higher than collected premiums, rather than borrowing from taxpayers in order to cover claims.
Note: The Biggert-Waters Act will not affect all policyholders equally; many policyholders will only see very small rate increases. It will affect subsidized policyholders the most, followed by grandfathered policyholders. This is a relatively small percentage of policyholders nationwide and in Virginia (subsidized policyholders make up about 20% of policyholders nationwide and about 15% in Virginia). To see how your community will be affected compared with others in Virginia, click here. Be sure to find out if you have a subsidized or grandfathered policy to help you determine whether you will be significantly affected by Biggert-Waters. Click here for more information.
Rate Increases by Property Type
Click here for a review of rate increases by structure type for older (subsidized pre-FIRM) structures in the highest-risk Special Flood Hazard Areas (SFHA). Note that this document does not address changes that will occur in 2014 (see below for details), or changes for post-FIRM structures or those outside of the Special Flood Hazard Area. Structures outside of the SFHA will not be largely affected.
Note: “Pre-FIRM” refers to structures that were built before the first FIRM, or Flood Insurance Rate Map (a.k.a. flood map), became effective in that locality. You can check this list from FEMA (the second column, “Init FIRM Identified”) to find out what this date is for your community. We recommend you also talk to your community floodplain manager because the dates in this list are not always accurate. The Special Flood Hazard Area is made up of the highest-risk flood zones, which are A- and V-zones on a Flood Insurance Rate Map. See the glossary for a further explanation of terms in this document.
Timeline of Rate Increases
Click here for a timeline of rate increases for different types of properties from the Federal Emergency Management Agency. Rate increases will be charged the next time the flood insurance policy is renewed after the effective date of that increase. For example, rates for subsidized businesses are set to increase 25% per year, effective October 1, 2013. The next time any subsidized business owner renews his/her policy after October 1, 2013, he/she will see a 25% increase over his/her premium from the previous year.
Note: The FEMA timeline refers to “subsidized” properties. These are properties with “pre-FIRM” structures that are located in the Special Flood Hazard Area (SFHA). “Pre-FIRM” refers to structures that were built before the first FIRM, or Flood Insurance Rate Map (a.k.a. flood map), became effective in that locality. You can check this list from FEMA (the second column, “Init FIRM Identified”) to find out what this date is for your community. We recommend you also talk to your community floodplain manager because the dates in this list are not always accurate. The Special Flood Hazard Area is made up of the highest-risk flood zones, which are A- and V-zones on a Flood Insurance Rate Map. See the glossary for a further explanation of these terms.
General Timeline (including rate increases for all relevant property types):
January 1, 2013, increases for Secondary Homes: Secondary homes that are located in high risk A- or V-zones and were built before the NFIP went into effect in their community will experience a 25% rate increase beginning with their next renewal after January 1, 2013. Rates will continue to increase 25% every year until actuarial rates are met (1). If the structure has been substantially damaged or improved in the past to the extent that it has been brought up to code and your flood insurance rates changed, this increase will not apply because the property is already being charged actuarial rates.
October 1, 2013, increases for certain property types: Non-residential properties, severe repetitive loss properties, properties whose cumulative flood claims payments have exceeded the value of that property, properties that experience damage equaling or exceeding 50% of the fair market value, or properties that have had substantial improvements equaling or exceeding 30% of the fair market value will experience a 25% rate increase beginning at the next renewal after October 1, 2013(2). Rates will continue to increase 25% every year until actuarial rates are met. If the structure has been substantially damaged or improved in the past to the extent that it was brought up to code and flood insurance rates changed, this increase will not apply because the property is already being charged actuarial rates.
October 1, 2013, full actuarial rates for policy changes (THIS HAS BEEN REPEALED): Any time a new flood insurance policy is purchased, a policy has lapsed, or a property is sold and the new property owner purchases flood insurance after July 6, 2012, premiums will be charged full actuarial rates (full rates begin October 1, 2013). This means that even if a property has been subsidized or grandfathered before any of these three actions occurs, that subsidy or grandfather provision will be immediately eliminated; no gradual rate increase will apply.
October 1, 2014, all remaining subsidized and grandfathered properties (THIS HAS BEEN REPEALED): When a locality adopts an updated set of Flood Insurance Rate Maps after October 1, 2014, all remaining subsidized and grandfathered properties will have their subsidies phased out. Beginning with the first renewal after this point, rates will increase 20% per year over a period of 5 years at which point actuarial rates will be met (3). In coastal Virginia, all flood maps are in the process of being updated or have been finished. For those localities where maps become effective before October 1, 2014, rate increases will not go into effect until the next round of map updates (which will likely not occur for at least another five years). For localities whose maps become effective after October 1, 2014, rate increases will begin when those maps become effective. For more information, see Map Updates in Coastal Regions.
(1) This rate increase is a 25% increase over the previous year’s premium, rather than 25% of the difference between the full actuarial rate and current rates.
(2) This rate increase is a 25% increase over the previous year’s premium, rather than 25% of the difference between the full actuarial rate and current rates.
(3) This rate increase is 20% of the difference between the full actuarial rate and current rates, rather than 20% of the previous year’s premium. This increase will be complete in 5 years, meaning full actuarial rates will have been met by the fifth year.