FEMA Risk 2.0 for Flood Insurance

On October 1, 2021, FEMA began phasing in a new flood insurance pricing system called Risk Rating 2.0: Equity in Action. These changes apply to new flood insurance policies. Most existing policies are not going to be affected until after April 1, 2022. Existing policy holders can take advantage of any premium decreases at the time of their renewal beginning October 1, 2021.

What’s Changing?

Since the 1970s, NFIP rates have relied predominantly on a property’s location with a zone on a relatively static Flood Insurance Rate Map. With the new methodology, FEMA now has access to modern insurance technologies, catastrophic models and data sets so it no longer requires zones or elevation certificates. The new methodology rates each individual home according to property specific rating factors such as its unique elevation, distance to water and cost to rebuild.

Risk Rating 2.0 prices flood insurance for each home individually rather than by flood zone. FEMA had not updated its rating system in 50 years. By adopting modern insurance industry technologies, standards and practices, FEMA is able to rate more precisely and accurately by using more flood risk factors and property-specific characteristics, including each building’s unique elevation, distance to water and cost to rebuild. The new rating system only affects NFIP risk-based rates and does not change flood mapping or insurance requirements. Buyers may assume seller policies, and any increases cannot exceed 18 percent per year by law.

Will prices go up?

As FEMA implements the new pricing system, some owners and buyers may have questions about flood insurance rate changes. Real estate agents and brokers are an information source, not flood or insurance experts. You can provide the facts that every home in America has some flood risk, and a flood insurance rate quote from a licensed insurance professional can help your clients make better informed decisions. You can also be ready with contact information for a few NFIP and private market insurance agents, licensed surveyors/engineers, and other flood risk professionals (e.g., your local government floodplain manager) who can offer risk assessment and mitigation resources and answer property-specific questions.

Most significantly, Risk Rating 2.0 provides more accurate, science-based rates up front so consumers can make better informed decisions. While the old rating system hid the subsidies,
Risk Rating 2.0 tells the truth about the risk and cost to insure a property so people will know before they make a decision to buy or build.

Risk Rating 2.0 creates a fairer flood insurance system

Risk Rating 2.0 will create a more equitable and sustainable flood insurance program by addressing rating disparities. Low-value properties will no longer subsidize high-value properties.

Under the previous system, policyholders with lower-value homes have been paying more than they should, and policyholders with higher-value homes have been paying less than they should. These lower-value homes have some of the highest rates in the NFIP today.

With Risk Rating 2.0, policyholders with lower-value homes will generally see a decrease in their cost of insurance – as FEMA’s new methodology accounts for more risk variables and rates each home individually. And, unlike the current methodology, when a property reaches its full risk rate under Risk Rating 2.0, increases stop.

Higher-value properties tend to make larger claims to NFIP than lower-value properties. This is what is known in the insurance industry as the “insurance to value” effect, which is why the private insurance market also accounts for replacement cost values in their rate quotes for standard home insurance policies.

For example, if a flood causes only 25 percent damage on a $1 million structure, it will reach the maximum coverage limit payable under the NFIP. Meanwhile, a $100,000 structure will never make a $250,000 claim, even if a flood causes a total loss. Yet, both the $1 million and $100,000 structures can pay the same premium under the old rating system.

Replacement cost value has now been added as a rating factor to ensure properties are insured to value, and lower-value properties are no longer subsidizing higher-value properties.

What is not changing?

Here is what is not changing under the new Risk Rating 2.0:

• Rate increases will not exceed 18% per year.
• Grandfathered rates including for newly mapped and pre-FIRM subsidized homes will continue.
• Policyholders will still be able to transfer discounts to a new owner by assigning their flood insurance policy to the
  new owner.
• Floodplain Management requirements will continue to be enforced by communities and lenders as usual.