For those considering an investment in real property (residential or commercial) along the eastern seaboard of the United States, insights are offered in an article published in April by the New York Times, “When Rising Seas Transform Risk Into Certainty” (Brooke Jarvis, 18 April 2017).

Some highlights follow. The upshot? Conduct your discovery and due diligence carefully. Try to think long-ish term (what are your long-term investment investment horizons, when do you plan to exit, e.g., sell your house or property, etc.). Consider a  variety of numbers (not only interest rates, number of bedrooms and bathrooms, square footage, appraisals, etc., but also sea levels, projected sea levels, flood zones, insurance premiums, any projected rise of insurance premiums, etc.). Ask your lender (if you are financing), real estate professional, and insurance professional lots and lots of questions.

• Economists aren’t sure if coastal property values will decline gradually, as the life expectancy of homes shrinks, or precipitously, “the first time a lender refuses to make a mortgage on a nearby house or an insurer refuses to issue a homeowner’s policy.” (Sean Becketti, chief economist, Freddie Mac)

• “Hundred-year flood zone” | A hundred-year flood zone sounds like sounds like a factor of time, as if the land were expected to flood only once every 100 years. What it really means is the land has a one percent (1%) chance of flooding each year.

• If the property that you are considering buying is in a “hundred-year flood zone,” then in order to get a federally backed mortgage, you will be required to pay for flood insurance through the National Flood Insurance Program (N.F.I.P.).
  • The N.F.I.P. is a government-subsidized system overseen by the Federal Emergency Management Agency (FEMA).

• Congress created the N.F.I.P. (the National Flood Insurance Program) in the late 1960s

• The N.F.I.P. was intended to encourage safer building practices
  • The N.F.I.P. offers insurance coverage, some of it subsidized, to communities that meet floodplain-management requirements;
  • People that want to buy a house in a flood-prone area are required to buy N.F.I.P. insurance coverage.
  • The N.F.I.P. provides grants for mitigation projects, like elevating houses, meant to reduce flooding damage.

• Critics of the N.F.I.P. observe that N.F.I.P. flood insurance, by bailing people out repeatedly and by spreading the true costs of risk, incentivizes people to build, and stay, in flood-prone areas instead of encouraging safer building practices.

• As storm damage becomes more costly, the N.F.I.P. is getting deeper and deeper (in the order of tens of billions of dollars) into debt. The expense of insuring coastal properties is increasing. Taxpayer-subsidized premiums are not able to meet the costs of insuring the coastal properties.

• In 2012 and 2014, Congress responded to the N.F.I.P.’s troubles with bills known as Biggert-Waters and Grimm-Waters.

• The Biggert-Waters bill of 2012 cut subsidies and phased out grandfathered rates so that premiums would start to reflect the true risk that properties face, achieving “actuarial soundness.”

• The Grimm-Waters bill of 2014 (Homeowner Flood Insurance Affordability Act of 2014, H.R. 3370) tried to slow the rate of premium increase.

• Prospective buyers are disturbed less about the risk of high waters and more about the certainty of high premiums.

• Insurance provides stability, both financial and mental, in an uncertain world, and implies “mastery of risk”.

• • As waters rise, flooding in low-lying places without sea walls will become more and more common.
  • The presence of water will become less about chance and more about certainty.
  • Few insurers are willing to bet against a certainty.

• The math of the “collective hedge against helplessness” (insurance) in the face of climate insecurity will get harder.

• Frank Nutter, president of the Reinsurance Association of America, states it bluntly,  “Constant risk — that’s not what insurance is about.”

• AIR Worldwide models the risks of catastrophic events for insurance companies and governments.

• According to AIR Worldwide, $1.1 trillion in property assets along the Eastern Seaboard lie within the path of a hundred-year storm surge.
  • $1.1 trillion represents only the risk on the East Coast under current sea levels.

• According to a 2008 analysis by Risk Management Solutions (R.M.S.) and Lloyd’s of London, annual losses from storm surges in coastal areas globally could double by the 2030s.

• In 2015, the N.F.I.P. asked R.M.S. and AIR Worldwide to update its modeling of financial exposure from possible storms to properties it insures across the country

• In 2016 and 2017, the N.F.I.P. transferred some of its risk to large, private companies known as reinsurers (insurance for insurance companies)

• A vote to reauthorize (or not) the N.F.I.P. is scheduled to take place in September of this year

• Some believes it is time to start limiting coverage for properties that are flooded over and over.
  • Multiple losses “should force us to shift our position where we make an offer of mitigation to a homeowner, and if they do not choose to take it, we don’t renew their policy.”

• Flooding is the most common, and most expensive, natural disaster in the United States.

• Private insurers have long declined to cover flood risk.

• Some private insurers are beginning to show an interest in covering flood insurance for the first time.
  • Again, prospective buyers are disturbed less about the risk of high waters and more about the certainty of high premiums.
  • The end of subsidized coverage and the possibility of higher premiums encourages private insurers
  • As flood insurance premiums increase,
  • private insurers have a greater incentive to compete.
  • Private insurers can seek and obtain private underwriting from companies such as Lloyd’s of London and A.I.G. subsidiaries.

• More accurate risk analysis, with powerful computers running more simulations that include more variables, also incentivizes private insurers
  • Premiums from private insurers can now cost 30 to 35 percent less than those policies bought through FEMA
  • Yet, private companies issue such policies in the belief that the outcomes against which risk is covered will not occur
  • Private insurance is “of course” not interested in covering severe-repetitive-loss properties or buildings whose exposure is higher than what can be recouped in premiums.

• Mike Vernon, an insurance agent in the Hampton Roads area of Norfolk/Virginia Beach, gets most of his business from referrals from real estate agents. He observes
  • “We’re often actually making the building worse to bring down premiums,” filling in basements, or preparing a house to let water flow through it instead of keeping it out (yes, the house may be damaged by moisture, but at least it won’t be pushed off its foundation). “Or we’re eliminating something good, like a sunroom on a slab.”
  • “People are getting killed. To an appraiser it’s still worth $300,000, but to the real world it ain’t worth nothing, because it’s not going to sell.”

See:

“When Rising Seas Transform Risk Into Certainty” | Brooke Jarvis, The New York Times, 18 April 2017

The National Flood Insurance Program (N.F.I.P.) | FEMA

“Biggert-Waters Flood Insurance Reform Act of 2012 Timeline” | FEMA

“H.R. 3370 – Homeowner Flood Insurance Affordability Act of 2014” | 113th Congress, Congress.gov

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