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National Flood Insurance Program (NFIP); Increased Rates for Flood Coverage

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AGENCY:

Federal Emergency Management Agency (FEMA).

ACTION:

Final rule.

SUMMARY:

We (the Federal Insurance and Mitigation Administration of FEMA) are increasing the amount of premium policyholders pay for flood insurance coverage under the NFIP for “pre-FIRM” buildings in coastal areas subject to high velocity waters, such as storm surges and wind-driven waves (i.e., “V” zones). (The term “pre-FIRM buildings” means buildings whose construction began on or before December 31, 1974, or the effective date of the community's Flood Insurance Rate Map (FIRM), whichever date is later. Pre-FIRM buildings and their contents are eligible for subsidized rates under the NFIP.) This rate increase brings the premiums we charge for pre-FIRM, V-zone properties more in line with their actual risk.

EFFECTIVE DATE:

May 1, 2002.

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FOR FURTHER INFORMATION CONTACT:

Thomas Hayes, Federal Emergency Management Agency, Federal Insurance and Mitigation Administration, 500 C Street SW., Washington, DC 20472, 202-646-3419, (facsimile) 202-646-7970, (email) Thomas.Hayes@fema.gov.

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SUPPLEMENTARY INFORMATION:

Summary of Comments

On December 3, 2001, we published at 66 FR 60176 a proposed rule to Start Printed Page 8903increase the rates we charge under the NFIP for flood insurance coverage for pre-FIRM properties located in V-zone areas.

During the comment period, we received four sets of comments. Two writers supported the proposal; two opposed it.

The two supporting the proposal represent insurance companies participating in the NFIP's Write Your Own program. The two opposing the rate changes are a State Coordinator for the NFIP and the Insurance Committee of the Association of State Floodplain Managers, a national association promoting sound floodplain management and flood hazard mitigation as well as flood preparedness, warning and recovery.

Lower Rates in Non-SFHAs

One of the insurance companies supporting the proposed rate increase suggested that there should also be a decrease in rates for “very low risk exposures in non-SFHA zones.” (“SFHA” zones are “special flood hazard areas” shown on FEMA's flood maps.)

We are already doing this. The NFIP currently offers lower rates for flood coverage under the Preferred Risk Policy (PRP), available only to properties in Zones B, C, and X. (These zones are areas of moderate or minimal flood hazards from the primary water source.) One may buy a PRP totaling $30,000 worth of building coverage and $8,000 worth of contents coverage for a building without a basement or enclosure for $131—well below the premium for comparable coverage in an A-zone area or a V-zone area. The lower premium we charge for PRPs is consistent with the commenter's recommendation.

Opposition to the Rate Increase

The two opponents of the rate change raised questions about the need for a comprehensive approach to reduce flood losses, the amount of the rate increase, the accuracy of the maps used for ratemaking, and erosion mapping. We will address their issues under the headings below.

Need for a Comprehensive Approach

The Insurance Committee of the Association of State Floodplain Managers (ASFPM) contended “that any rate increase must be part of an overall effort to evaluate all measures to reduce flood losses, and such measures must not be based solely on increasing income by increasing the cost of flood insurance, but need to focus on mitigation measures to reduce claims against the NFIP.”

We agree with this recommendation. This rate increase is part of a comprehensive approach we are currently pursuing to reduce the subsidy for the NFIP. We have also developed strategies for addressing the costliest drain on the NFIP—repetitive loss properties insured under the NFIP. Ten thousand of those properties currently insured under the NFIP have had four or more flood losses, or two or three losses that cumulatively exceed the value of the building. Within the scope of our budget authority for fiscal year 2002, we will target the riskiest flood-prone properties, especially the repetitive flood loss structures, for mitigation activities, such as relocation, elevation, floodproofing, and other mitigation measures through mitigation grants with the States.

This rate increase is only one incremental step in a much larger campaign to reduce the exposure of property to flood damages, insure more of the Nation's property owners against flood loss, and mitigate future flood losses so that we can continue to operate the NFIP on a financially sound basis.

Taking this step—a modest rate increase for the first layer of coverage for pre-FIRM, V-zone properties—is not at odds with nor does it prevent us from proceeding in other areas such as mitigating repetitive flood loss properties, reducing the subsidy for the NFIP, and promoting the sale of flood insurance. We will also continue to use every opportunity, such as this modest rate increase, to reduce the NFIP's subsidy and mitigate future flood damage.

Amount of Rate Increase

The Insurance Committee of the ASFPM, which opposes the rate increase, also said that the rate increases “range from 10% to 11.5% in rates for pre-FIRM Velocity Zone structures.” This is inaccurate. As we said in the proposed rule, “these proposed increases apply only to the rates for the “first layer” of flood insurance coverage.” It is estimated that the average total premium for all pre-FIRM, V-zone policyholders will increase to $936, an increase of 6.3% over their current average premium.

This rate increase, therefore, falls within the statutory limit for rate increases imposed by Section 572 of the National Flood Insurance Reform Act of 1994, Pub. L. 103-325, 42 U.S.C. 4015. The corresponding rate increases for other classes of property affected by this rule also fall under this statutory limit.

Exposure to Loss for V-Zone Properties

One opponent of the rate increase argued that we should not increase rates for pre-FIRM, V-zone properties since pre-FIRM, V-zone policyholders in the State of Alaska are already paying “far beyond what the already high premiums have paid out in claims.” This opponent also pointed out that a review of the total claims paid for pre-FIRM, V-zone properties in Alaska “does not support the FEMA assertion that pre-FIRM, V-zone properties are ‘a particularly risky class of properties.’ ”

The H. John Heinz III Center for Science, Economics and the Environment, which conducted for FEMA a Congressionally-mandated study evaluating erosion hazards, disagrees with this position. The Heinz Center's report characterizes the “V zone” as the “most hazardous coastal flood risk zone.” (See page 39 of Evaluation of Erosion Hazards, April 2000). The report, which can be found on FEMA's web site at: http://www.fema.gov/​library/​erosion.pdf, also points out that current insurance rates under the NFIP “do not reflect the magnitude of the erosion risk faced by any individual policyholder.” Since V-zone areas—the areas affected by this rule—contain areas subject to erosion, this rate increase will help close the gap somewhat for this rate insufficiency under the existing mapping authority FEMA has.

We would also point out that there are 4.3 million policies currently in force under the NFIP nationwide; 2,260 flood insurance polices are currently in force in Alaska. Of Alaska's 2,260 flood insurance policies, only eleven (11) are written on properties located in V-zone areas. Those eleven policies for V-zone properties in Alaska do not represent a credible group on which to make ratemaking decisions for pre-FIRM, V-zone properties across the entire country. We need a much larger population of risks to make ratemaking decisions—decisions that will affect similar classes of risks for a national program. We estimate that the proposed rates for first layer V-zone coverage are less than 20% of the full-risk actuarial rate for that layer. We have based this rate increase on the loss experience and loss expectations for all-pre-FIRM, V-zone properties under the NFIP.

Also, we would argue that the limited losses experienced by V-zone properties in Alaska does not result from their lower exposure to loss but rather from the low number of flood insurance policies (eleven) written on properties in Alaska's V-zone areas and the Start Printed Page 8904resulting extended time periods needed for the true exposure to emerge.

The Issue of Erosion

The commenter says, “A much riskier class of properties appears to be structures subject to the threat of coastal erosion where a large percentage—at least in Alaska—are paying Preferred Risk Premium Rates but probably are subject to catastrophic loss or substantial damage and not located within a mapped flood zone.”

The Heinz Center study for FEMA concluded that the risk to properties in coastal areas is increasing, that the premium rates for flood insurance in coastal areas will in the future be too low, and that Congress should give FEMA the funds and mandate to map areas subject to coastal erosion—about 1/3 of the properties along the coast. Lacking the authority at present to isolate properties in V-zone areas that are subject to erosion risks, this modest rate increase for V-zone properties is a step toward bringing premiums in line with a risk that the Heinz Center study demonstrates is worsening.

Comparison of May 1, 2002 Rate Increases With Current Rates

The following chart compares the current rates we charge for pre-FIRM, V-zone properties with the rate increases for pre-FIRM, V-zone properties to go into effect May 1, 2002. The rates for pre-FIRM, A-zone properties are unaffected by this change. Also these increases apply only to the rates charged for the “first layer” of flood insurance coverage set by Congress in Section 1306 of the National Flood Insurance Act of 1968, as amended (Pub.L. 90-448):

Type of structureCurrent V zone1 rates per year per $100 coverage on:To take effect May 1, 2002: V zone rates per year per $100 coverage on:
StructureContentsStructureContents
1. Residential:
No Basement or Enclosure.82.95.911.06
With Basement or Enclosure.88.95.981.06
2. All other including hotels and motels with normal occupancy of less than 6 months duration:
No basement or Enclosure.951.901.062.10
With basement or Enclosure1.011.901.122.10
1 V zones are zones V1-V30, VE, and unnumbered V zones.

Adequacy of FEMA's V-zone Maps

The opponents of the rate increase also argued that V-zone maps need to be updated, and that, until such updating is made and inaccuracies corrected, the rate increase is inappropriate. We recognize that flood maps need to be updated periodically—especially those containing erosion-prone areas where the flood hazard is increasing. That is why we are committed to a multi-million dollar map modernization effort for this fiscal year and beyond; however, to delay needed rate adjustments for a national program on the basis of specific disputed maps or studies would be an overreaction. There are procedures in place for restudying and remapping flood-prone areas; we also have regulatory procedures in place for appealing flood elevations derived from our studies and for correcting or amending published maps by letter. We will refer the expressions of concern about our V-zone maps in general, as well as the specific examples of Alaska's V-zone maps, for consideration and appropriate action within the Federal Insurance and Mitigation Administration.

Request for an Extension of the Comment Period

The two opponents of the rule also pointed out that the 30-day comment period fell within the holiday season, and they asked us to consider an extension beyond January 2, 2002. We contacted the Association of State Floodplain Managers to let them know that, while we will not extend the comment period, we would wait until January 14, 2002—an additional two weeks—to assure them that we would consider any comments that may have been in transit at the close of the comment period. We also pointed out that the proposed rule also offered the public the options to submit comments by email and facsimile. The FEMA Rules Docket Clerk reported that no additional comments were received between January 2, 2002—the official end of the comment period—and January 14, 2002, the last day we would accept any outstanding comments or comments that may have been in the mail at the end of the comment period. In line with the Association's suggestion during that telephone conversation, we will do our best to ensure that any future proposed rate increase will be published well before the holiday season to avoid any potential inconvenience to the public or interested stakeholders.

National Environmental Policy Act of 1969

Under section 102(2) (C) of the National Environmental Policy Act (NEPA) of 1969, 42 U.S.C. 4317 et seq., the implementing regulations of the Council on Environmental Quality, 40 CFR parts 1500-1508, and FEMA's regulations on Environmental Considerations, 44 CFR part 10, we conducted an environmental assessment of this rule. The assessment concludes that there will be no significant impact on the human environment as a result of the issuance of this final rule, and no Environmental Impact Statement will be prepared. Copies of the environmental assessment and Finding of No Significant Impact are on file for inspection through the Rules Docket Clerk, Federal Emergency Management Agency, room 840, 500 C St. SW., Washington, DC 20472.

Executive Order 12866, Regulatory Planning and Review

We have prepared and reviewed this rule under the provisions of E.O. 12866, Regulatory Planning and Review. Under Executive Order 12866, 58 FR 51735, October 4, 1993, a significant regulatory action is subject to OMB review and the requirements of the Executive Order. The Executive Order defines “significant regulatory action” as one that is likely to result in a rule that may:

(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or Start Printed Page 8905State, local, or tribal governments or communities;

(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

(3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

(4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

For the reasons that follow we have concluded that the rule is neither an economically significant nor a significant regulatory action under the Executive Order. The rule would result in a modest increase in premiums for V-zone, pre-FIRM buildings and their contents. The adjustment in premiums rates will increase by slightly less than $3 million the amount of premium collected and deposited in the National Flood Insurance Fund each year. It will not have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, the insurance sector, competition, or other sectors of the economy. It will create no serious inconsistency or otherwise interfere with an action taken or planned by another agency. It will not materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof. Nor does it raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

The Office of Management and Budget has not reviewed this rule under the provisions of Executive Order 12866.

Paperwork Reduction Act

This rule does not contain a collection of information and is therefore not subject to the provisions of the Paperwork Reduction Act.

Executive Order 13132, Federalism

Executive Order 13132 sets forth principles and criteria that agencies must adhere to in formulating and implementing policies that have federalism implications, that is, regulations that have substantial direct effects on the States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies must closely examine the statutory authority supporting any action that would limit the policymaking discretion of the States, and to the extent practicable, must consult with State and local officials before implementing any such action.

We have reviewed this rule under E.O.13132 and have determined that the rule does not have federalism implications as defined by the Executive Order. The rule would adjust the premiums for pre-FIRM buildings in V-zone areas. The rule in no way that we foresee affects the distribution of power and responsibilities among the various levels of government or limits the policymaking discretion of the States.

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List of Subjects in 44 CFR Part 61

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Accordingly, we amend

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PART 61—INSURANCE COVERAGE AND RATES

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1.The authority citation for part 62 continues to read as follows:

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Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of 1978, 43 FR 41943, 3 CFR, 1978 Comp., p. 329; E.O. 12127 of Mar. 31, 1979, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.

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2. Revise § 61.9(a) to read as follows:

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Establishment of chargeable rates.

(a) Under section 1308 of the Act, we are establishing annual chargeable rates for each $100 of flood insurance coverage as follows for pre-FIRM, A zone properties, pre-FIRM, V-zone properties, and emergency program properties.

Type of structureA zone rates 1 per year per $100 coverage on—V zone rates 2 per year per $100 coverage on—
StructureContentsStructureContents
1. Residential:
No Basement or Enclosure.68.79.911.06
With Basement or Enclosure.73.79.981.06
2. All other including hotels and motels with normal occupancy of less than 6 months duration:
No Basement or Enclosure.791.581.062.10
With Basement or Enclosure.841.581.122.10
1 A zones are zones A1-A30, AE, AO, AH, and unnumbered A zones.
2 V zones are zones V1-V30, VE, and unnumbered V zones.

(Catalog of Federal Domestic Assistance No. 83.100, “Flood Insurance”).

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Dated: January 31, 2002.

Robert F. Shea,

Acting Administrator, Federal Insurance and Mitigation Administration.

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[FR Doc. 02-4389 Filed 2-26-02; 8:45 am]

BILLING CODE 6718-03-P