Flood insurance premiums for thousands of Long Islanders who bore the brunt of superstorm Sandy's devastation could double over the next four years as Washington starts phasing out long-running subsidies for properties at risk from coastal storms.
Beginning next year, the increases will impact vacation homes, businesses, severely storm-ravaged properties and those that flood time and again. The move is part of a broader push to reform the debt-ridden National Flood Insurance Program in hopes of running it more like a private insurance company.
The federal program has long offered policies at a fraction of the actual cost of protecting properties at risk for flooding, including in Hempstead, Oyster Bay, Freeport and elsewhere on Long Island, industry experts said. The approach has helped make coastal living more affordable. But it has forced Washington to borrow repeatedly to fund claims after disasters, leaving the flood insurance program $17.8 billion in debt.
"The long-term health of the program is dependent on having enough capital to meet the needs of policyholders," said Steve Harty, president of National Flood Services, a Montana company that processes federal flood insurance claims. "We are playing catch-up now."
High cost of subsidies
Most private insurance companies won't write flood policies, saying they are too risky. So the federal government offers subsidized rates, making the average annual premium $585. If written by a private insurer, the average would be $1,166, according to a study by the Property Casualty Insurers of America, a trade group.
Premiums for properties in high-risk flood areas are even more subsidized, costing an average of $1,093 a year. That's less than one-third of the $3,367 that private insurers would charge, the study found.
"Clearly the premiums are not accurate, and they need to go up," said Charles Nyce, an assistant professor of risk management and insurance at Florida State University.
Established in 1968, the National Flood Insurance Program covers about 5.5 million homes and businesses, including roughly 82,000 on Long Island. Flood insurance is required for any homeowner who has a federally backed mortgage and lives in an area that is apt to flood at least once every century.
Unlike a private insurance company, the program does not need to make a profit. And since it can borrow from the government, it does not need a large reserve to cover widespread losses in the wake of disasters. As a result, many of its premiums are not based on the complex actuarial formulas used by private insurers. Rather, properties built before flood maps were drawn are offered subsidized rates.
The strategy plunged the program into debt in 2005, as Hurricanes Katrina, Rita and Wilma left it with staggering losses.
The case against subsidies
Aside from being fiscally unsustainable, discounted flood rates have long been derided as unfair. Critics of the program say taxpayers in landlocked towns like Uniondale shouldn't have to subsidize the cost of flood insurance for homes in seaside areas such as the Hamptons.
The increases scheduled for next year -- they would have kicked in with or without Sandy -- are mandated under a law signed by President Barack Obama in July reauthorizing the flood insurance program, which is run by the Federal Emergency Management Agency. It calls for rates of certain properties to rise by as much as 25 percent annually until premiums match the actual level of flood risk.
"By moving to full risk-based premium rates for certain properties, the law strengthens the financial position of the program and increases its ability to fund future claims," FEMA spokesman Dan Watson said.
The first increases, for vacation homes, take effect Jan. 1. The others, including for businesses, will kick in after July 1. FEMA has not determined the date.
Others whose premiums may rise include 420 policy holders on Long Island whose properties have flooded repeatedly since 1978, prompting them to file a combined 2,300 claims for a total of $63.4 million.
These and other chronic flood properties across the nation have long been drags on the program, experts said, accounting for an inordinate share of overall claims. On Long Island, they are primarily along the South Shore, with concentrations in Hempstead, Freeport, Brookhaven, Island Park, Amityville and about 30 other towns and villages. In Quogue, three single properties have filed 10 claims totaling $682,000, according to FEMA.
Another group subject to premium increases are those smacked hardest by Sandy. Under the law, homeowners whose flood-damage repair bills exceed 50 percent of the total value of their homes will lose their subsidies.
With repairs still under way, it's hard to pinpoint how many homes that will entail. But with Sandy destroying more than 2,000 residences on Long Island and severely damaging thousands more, the impact could be widespread, officials said.
The law is intended to eventually bring all flood insurance premiums up to full cost by ending the practice of grandfathering subsidies to buyers when houses are sold.
Yet, all rates won't go up. In some cases, Long Islanders who rebuild homes to better withstand floods could actually see their premiums drop -- even without subsidies, insurance experts said.
Still, many are expected to rise. And that will take a toll on Long Islanders, economists said.
"It is going to have a wide impact," said Pearl Kamer, chief economist at the Long Island Association, a business group. "It's another hit to household budgets in an economy already struggling to recover from the recent recession."
Under the new law, it could take decades to phase out all flood-insurance subsidies. An unlikely coalition of environmentalists, deficit hawks, free-market groups and insurance lobbyists is pushing to speed up the process.
Cut-rate flood insurance premiums, they say, add unnecessarily to the national debt and encourage development in fragile coastal regions.
Their argument calls for shifting some of the risk from taxpayers onto global reinsurance companies, which write huge policies for private insurers to help them cover settlements during years with a high number of disasters. Think of it as insurance for insurance companies.
The new law for the first time requires the flood program to consider buying reinsurance.
"It would relieve some of the pressure of borrowing from the Treasury," said Steve Ellis, of Taxpayers for Common Sense, a nonpartisan federal-budget watchdog group.
Consumer advocates, however, caution that reinsurance would push premiums even higher. And Howard Kunreuther, co-director of the Wharton Risk Management Center at the University of Pennsylvania who has studied flood insurance extensively, said it is unlikely reinsurance companies would bite until rates match risks.
Nonetheless, Frank Nutter, president of the Reinsurance Association of America, said the industry is eager for the option. In the end, he said, it could make catastrophes cheaper for taxpayers.
"Sure, they could keep borrowing the money," Nutter said. "But it's not a viable model."