Flood insurance continues to rise sharply for Florida’s retail property owners

Rates in the government-subsidized National Flood Insurance Program, run by FEMA, jumped by an average of 5.4 percent in April, following increases in 2016 that saw some owners pay as much as 25 percent more than they had in 2015. More such increases are imminent. “Unfortunately, we see no end in sight,” said Douglas Jones, managing partner of Coral Gables, Fla.–based JAG Insurance Group, a property and casualty insurer. “Rates will continue to go up and up.”

It is not only hurricanes that are a threat. In Sunrise, Fla., south of Miami, back-to-back storms with record-breaking rains inundated the parking lot of Sawgrass Mills in late spring, forcing the center’s closure for three days, from June 7 to June 9. On June 10, flooding in central Florida caused a sinkhole to open up in a parking lot fronting Gaitway Plaza, in Ocala, swallowing a car and breaking a gas main that forced the shopping center’s evacuation. Across the street, numerous vehicles were flooded in the parking lot of the Shady Oaks Shopping Center.

Compounding industry concern is a lack of access to more-affordable private flood insurance. Banks have become skittish about advancing loans to property owners in high-risk zones near the water, says Jones. Much of the concern is over hurricane-related storm surges, particularly on Florida’s West Coast, where the water is considerably shallower than on the Atlantic side, he says.

Most flood hazard zones are east of I-95, on the state’s East Coast, and west of I-75, on the West Coast, says Mez R. Birdie, CRX, CSM, director of retail and investment services at Orlando, Fla.–based NAI Realvest. “But because Florida includes lots of lakes, rivers and canals, many developments are affected beyond the coasts.” Private insurers remain choosy about who qualifies for coverage, says Birdie. Depending on the type of flood zone, flood insurance adds some 20 to 40 cents per square foot to retail rents in Florida, he says. “There is also a 30-day wait period before a flood policy becomes effective.”

Some of Jones’ Florida clients are paying more for NFIP flood insurance than for property and wind insurance combined, he says. “So you have to turn over every stone to find private alternatives,” he said. Some owners are still paying through the nose because their insurance agents either lack the knowledge of private plans or fail to do the research into the alternatives, he says. One option for owners who do not qualify for a private flood-insurance policy through a single carrier could be to contract with multiple insurers to share the risk, Jones advises.

Many owners make the mistake of reducing coverage amounts to lower overall expenses, says Birdie. A better approach would be to raise the deductible, he says. Owners can also save on insurance by including their properties in a master policy provided by their property-management companies, Birdie says. “My company’s master insurance policy, which includes coverage for property, liability, flood and excess [liability], provides a savings of 30 percent to 40 percent in lower premiums,” Birdie said. “These savings alone more than pay for property-management fees.”

A building’s physical profile will have a significant impact on flood insurance costs, says risk-management specialist Brian DiDonato, senior manager of CBRE’s global risk management division. “And the better the quality of information provided to insurance carriers, the more likely you will obtain a more competitive quote.”

To keep insurance costs lower and protect their properties, some centers are making accommodations to steadily rising tides. At Miami’s Brickell City Centre, Hong Kong–based Swire Properties built the mixed-use complex higher than the flood plain. Swire also constructed an elevated sea wall and installed floodgates that can tightly seal off the underground car park at the center, which is being built in phases to include shops, residences, offices and a hotel.

While coastal property owners will always pay more for flood insurance, some inland areas may also see increases, depending on the region and on the ways carriers choose to factor in storm surge risks, DiDonato says. Through NFIP, flood coverage is available for up to $500,000 for building and contents separately, he says.   

The ability of the insurance industry to statistically predict the risks for flooding is still in its infancy, relative to earthquake and hurricane modeling, says DiDonato. Until an accurate model is created, “coverage will be limited in availability, and it will be priced accordingly.”

A spring 2017 report from the American Academy of Actuaries titled National Flood Insurance Program: Challenges and Solutions, says the use of big data combined with advanced computing is opening up opportunities for private insurance sellers to insure and reinsure flood risks. The enhanced data will also offer the NFIP better ways to align premium with risk, reducing the need for subsidies, according to the report.

About 1.8 million of the approximately 5 million U.S. businesses and homes covered by NFIP are in Florida, according to FEMA. With its 1,200 miles of coastline and with three-fourths of its residents living near the coasts, Florida is considered the most vulnerable to rising sea levels of any state in the continental U.S. Meanwhile, federal flood programs in Florida remain underfunded, “but luckily, lack of major hurricanes in the past decade has helped increase reserves,” said Birdie.

Real estate investment in Florida may no longer be only about the next hot property, but rather about the next dry property. Parts of Florida coastal cities that are farthest from the beach or at the highest elevations are quickly rising in value and are targets for investors, particularly in Miami, notes Jesse Keenan, a lecturer in architecture who teaches climate-change adaptation at the Harvard University Graduate School of Design, in a May article in Scientific American.

U.S. Sens. Marco Rubio and Bill Nelson, both of Florida, are seeking renewal of the 11th-hour deal made in 2014 with NFIP that established flood-insurance premiums of 40 to 45 percent of their total cost, with the taxpayers subsidizing the balance. That deal expires Sept. 30. Roughly a dozen real estate trade associations, including ICSC, have asked Congress to reauthorize and reform the NFIP. Already, Floridians pay four times more into the NFIP than they receive in claims, according to Rubio. Complicating the situation, however, is NFIP’s $24.6 billion debt, attributable in large part to hurricanes Katrina (2005) and Sandy (2012). This is a debt that NFIP has said it cannot repay. Any lapse in NFIP programs could disrupt real estate sales in flood-prone areas, where banks require flood insurance before they will approve loans, officials warn.

Congressional budget hawks have said the NFIP program should be more self-sustaining and market-based, and they have advocated changes that are likely to limit its accessibility to commercial properties. If the September renewal deadline passes without renewal or a new law, existing NFIP policies will remain in effect, but new ones will not be issued.

What is more, flood maps are constantly being redrawn, given the rising seas and the resultant higher risks, Jones says. “So unless you’re grandfathered in,” he said, “you may be in for a surprise.”