A study by The RAND Corp. says rising flood insurance prices resulting from redrawn flood maps and changes in the National Flood Insurance Program will present various challenges for New York.
Among those challenges will be economic hardship faced by homeowners in the highest-risk areas, who might face annual flood insurance premium increases of $5,000 to $10,000 along with decreased property values and increased foreclosures, Santa Monica, Calif.-based RAND said Friday. Some commercial properties also will be adversely affected, the study concludes.
The study, prepared for New York Mayor Michael Bloomberg's Office of Long-Term Planning and Sustainability, looks at the flood insurance market in New York before Superstorm Sandy and the changes since including the effects of changes in the National Flood Insurance Program and redrawn flood maps for New York.
Among primary factors driving those changes are the Biggert-Waters Flood Insurance Reform Act of 2012, which eliminated flood insurance subsidies that had existed for certain classes of structures and is phasing out the grandfathering of certain structures when flood maps are updated, which allowed property owners to pay flood insurance premiums based on the prior map.
A second significant factor is updating the Federal Emergency Management Agency's flood risk maps for New York. Those maps are expected to be finalized in 2015, but preliminary versions released in June showed an approximate doubling of the number of structures in zones designated high-risk and greater potential flood depths for structures already in high-risk zones.
The study noted that among commercial insurance buyers the purchase of flood and business interruption insurance declines significantly as the size of the company decreases.
RAND found that there is a very high uptake of flood coverage among large firms — estimated at 80% to 90% — typically through manuscript property insurance policies. A small number of those companies — estimated at less than 25% — purchase NFIP coverage to cover a portion of their deductible, RAND said.
Brokers RAND interviewed said large companies aren't having trouble obtaining private insurance coverage post-Sandy, though they need to find more insurers to assemble the necessary coverage layers.
The RAND study said the largest middle-market companies typically purchase manuscripted policies that include flood coverage in much the same fashion as large companies. Smaller middle-market companies, however, purchase package policies that often include NFIP coverage for floods if they purchase flood insurance, with some purchasing private market excess coverage above the NFIP limits, according to the study.
The study said Superstorm Sandy exposed various gaps in the flood insurance system that should be addressed.
For commercial structures with NFIP coverage those include limited basement coverage, lack of business interruption or business expense coverage and inadequate coverage for mixed-use buildings, the study said.
For privately insured commercial structures the most important gaps are lack of coverage for business interruption or extra expenses in cases in which there was no physical flood damages to the premises and varying coverage for street and area closures imposed by civil authorities.
In response to the NFIP changes, RAND said, “The most obvious way to reduce risk-based insurance premiums is to mitigate risk.” Measures can include developing dunes, integrating flood protection systems and retrofitting buildings, though some of those measures “would pose challenges in New York City because of the particular characteristics of the building stock in the city,” RAND said.
Consequently, RAND recommended that policymakers take steps such as working with FEMA to collect data on structures in high-risk zones and making sure that risk mitigation efforts are reflected in NFIP rates.
RAND also suggested consideration of a multilayered approach to mitigation and protection. The efforts would include everything from low-interest loans to fund mitigation efforts to large-scale coastal protection measures, as well as changes in land use to remove structures from high-risk areas when owners are willing to sell.
The report, Flood Insurance in New York City Following Hurricane Sandy, can be found here.