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Personal Risk Management

Biggert-Waters 2012 and the New Normal

Timothy O'Brien | November 1, 2013

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The inside of a home with water flooding the ground floor

As many readers know, the Biggert-Waters Flood Reform Act of 2012 (BW12) has introduced a myriad of changes to the National Flood Insurance Program (NFIP). While actuarial integrity may be a new concept to those administering the NFIP, insurance industry veterans understand that the changes being introduced are long overdue. For the first time since the formation of the NFIP in 1968, the rates that will be charged for homes most vulnerable to flood loss will finally begin to reflect the actual risk.

As with any significant insurance change, the mainstream media have created much confusion over BW12, and grandstanding politicians pretended to try to forestall implementation on October 1, 2012. The fact that their ploy to delay the implementation of BW12 occurred on the same day the federal government was shut down was an irony lost on no one. 

With all the hoopla over BW12, it seems our industry has missed the opportunity to provide consumers with the simple explanation about what to expect and why the changes are necessary. To provide those we serve with a summary that offers a real perspective, try offering this: BW12 was passed because the historic rate subsidies provided to those who live closest to the water, especially those in seasonal homes and homes that are poorly elevated, have caused the NFIP to become fiscally insolvent. By introducing actuarially based premiums for those risks that are most vulnerable to loss, BW12 will provide the program an opportunity to become fiscally viable so that it can provide flood protection for all.

While there are many additional details associated with BW12, this summary helps frame for consumers an important aspect missing from many news reports.

The only substantial cost increases being introduced will impact only the 20 percent of the policyholders who have been paying premiums well below those required to offset their collective losses.

As personal risk management professionals, we should focus our efforts on helping those consumers who are experiencing the greatest impact to examine the strategies that are available to help them manage their rising insurance costs. In lieu of the previously subsidized rate structure that has jeopardized the future of the NFIP, those seeking lower flood insurance costs will finally need to take the steps needed to improve the risk profile of their residence. With some careful guidance, we can help them to do so.

Solution, Meet Problem

During these early days of BW12 implementation, lawmakers, and even a few in our industry, have been asking the few private insurers offering flood coverage if they might be willing to insure high-risk residences at rates the NFIP has finally determined to be inadequate. While rising premiums are surely a problem for many living in high-risk areas, who can possibly think asking private insurers to provide coverage at rates proven to be highly deficient is a viable solution?

The private insurance industry already has a process that rewards policyholders with lower costs when they take the steps needed to improve their risk profile. Let's agree to shift our conversations to help consumers understand that the cost of insurance does and should reflect the characteristics of the risk being insured and that, to achieve lower costs, they must first take steps to reduce the risk of loss.

NFIP Regulations and Building Codes have long required that any residential building constructed in Flood Zone A have the lowest floor elevated to or above the base flood elevation (BFE). Enclosed areas are permitted under elevated buildings provided that they meet certain use restrictions and construction requirements, such as the installation of flood vents to allow for the automatic entry and exit of floodwaters.

Why have so many homeowners long ignored this "requirement"? With cost subsidies available to those who ignored it, there was simply not enough financial pain prior to BW12 to compel homeowners to comply with this important requirement. With the passage of BW12 and the removal of taxpayer-subsidized premiums, the long-prescribed solution of "wet floodproofing" has finally met a problem many homeowners will now care about solving: skyrocketing flood premiums! I wonder how many readers have performed an Internet search for the term "wet floodproofing." I know that, prior to the passage of BW12, I had not.

Wet Floodproofing: Control the Severity Risk

Research reveals the greatest risk of large loss to a home from a flooding event is caused by foundation collapse. Knowing this, actuaries have developed higher rates for those homes at risk of foundation collapse and lower rates for homes that have measures in place to reduce this risk. As it concerns loss frequency, it is contemplated that homes in a high-risk flood zone will experience flood damage at some point. For homes where the risk of a flood is high, the most important question becomes how severe the damage will be.

Since it is nearly impossible to protect homes located in high-risk flood zones from ever sustaining a loss, efforts should instead be focused on helping at-risk homeowners to examine the precautions they can take to reduce the severity of the damage their home will sustain from a flooding event.

Wet floodproofing is most easily achieved by installing engineered flood openings, which are more commonly referred to as flood vents. While allowing floodwater to enter a home seems counterintuitive, engineers have long known that allowing some surface water to enter a house balances the hydrostatic pressure inside and outside of the house, greatly decreasing the amount of damage to the foundation. Hydrostatic loads occur when water comes into contact with a building. There are two different forces: lateral forces, which act as pressure on the sidewalls, and vertical forces, which act as buoyancy, lifting the structure up.

Rather than preventing water from entering a home, flood vents allow the floodwater to enter and exit the enclosed area. Allowing floodwater to enter and exit relieves the hydrostatic pressure by allowing for the equalization of water on both sides of a wall.

I encourage readers to perform an Internet search for the term "hydrostatic pressure." Add "flood damage" to the same search, and you will access volumes of information that explains this risk. Although fewer sites will reveal the solutions that are available to manage this risk, the following link is to one enterprising company that offers a wealth of information for any insurance professional seeking insights on the broad topic of helping consumers better protect their homes from a flood: Smart Vent.

Offer Proof Sources

The Internet is full of information documenting how homeowners across the country have embraced strategies to better protect their homes from flood damage, while also lowering their flood insurance costs. Providing those we serve with third-party case studies, testimonials, and video evidence to document the benefits of wet floodproofing can be impactful. I encourage readers to perform an Internet search.

All Vents Are Not Equal

While many homes have air vents installed, common air vents are not designed to reduce flood damage and do not comply with NFIP requirements, even if an improperly completed elevation certificate indicates otherwise. ICC-ES Evaluated engineered openings should be listed as the first flood opening option and should be seen as the preferred method as these openings have been designed, tested, and certified as flood openings.

Unique (project-specific) engineered openings should be listed as the second-best option for meeting the flood opening requirements. These openings are designed for a specific building and come with an original engineered opening certificate with the backing from a licensed design professional. Nonengineered openings should be listed third and regarded as a flawed alternative to the flood opening requirements. These openings are not designed as flood openings and do little to mitigate flood damage, while leaving the liability for compliance on the surveyor and construction official.

Installing compliant flood vents into existing homes is an easy and inexpensive process for those who are well trained. Retrofitting involves either replacing existing air vents with compliant flood vents or cutting new holes in the foundation/enclosure walls and garage walls/garage doors to install compliant flood vents. Depending on the specific challenges at the home, there are instances in which the home's mechanicals must be raised, perimeter dirt surrounding the home excavated, and fill brought in, and in some cases, the home may even need to be elevated.

But Can I Save Money?

As we all know, while reducing the risk of severe loss may be of interest to some, reducing the cost of flood insurance will interest all consumers. While the premium reduction impact of flood mitigation strategies is specific to each home, one leading expert, Smart Vent Products, Inc., of Pitman, New Jersey, is happy to document the savings realized by many of their customers. Smart Vent Products reports that, on average, homeowners have experienced a positive return on their investment (installation and materials) in less than 2 years. The company offers the following examples, each NFIP policies and before BW12.

  • Rengstorff Windrose Homeowners Association (Mountain View, California)—NFIP insurance went from $10,000 to $4,000 a year: a 60 percent reduction
  • Esmond Carr (Gentilly, Louisiana)—NFIP insurance went from $1,600 to $300: an 81 percent reduction
  • Jim Herley (Chesapeake, Virginia)—NFIP insurance went from $1,600 to $244: an 85 percent reduction
  • Clem Huerstel (insurance agent in New Orleans, Louisiana, worked with customer on retrofit)—NFIP insurance went from $3,100 to $300: a 90 percent reduction
  • Larry Owens (Cape San Blas, Florida)—NFIP insurance went from $5,500 to $500: a 90 percent reduction
  • Mike Koch (Indian Rocks Beach, Florida)—NFIP insurance went from $3,000 to $375: an 88 percent reduction
  • Bill Bruce (Miami Springs, Florida)—NFIP insurance went from $3,700 to $379: a 90 percent reduction

Adjusting to the New Normal

BW12 has created an uncomfortable new normal in flood insurance, presenting perhaps even greater challenges for insurance professionals than for consumers. With the elimination of taxpayer subsidies, reducing increased insurance costs will now require specialized knowledge that results in the substantive improvement of the risk profile of a home. Absent the technical depth to explain all of the construction and engineering-related issues and solutions, what resources are available to equip risk advisers to help consumers begin to understand the issues and solutions, and who can provide specialized assistance? The Association of State Floodplain Managers is an organization of professionals involved in floodplain management, including flood hazard mitigation and flood preparedness. For those seeking an expert resource, consider establishing a connection with a Certified Floodplain Manager.

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