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The Federal Emergency Management Agency (FEMA) declared that it is using a new risk rating system to reform the pricing scheme of the National Flood Insurance Program (NFIP). FEMA reports that this system, being called “Risk Rating 2.0,” will provide more information and adjustments regarding flood risk. By doing this, Risk Rating 2.0 will clarify policyholders’ flood risks more transparently and provide more precise and impartial premium rates.
At present time, the National Flood Insurance Program covers almost $1.3 trillion for over 5 million policyholders nationwide. Under the new system, 23% of the policyholders will receive reduced premium rates. The other 77% will encounter premium rates that increase at varying levels. FEMA will implement these premium rate adjustments through a phased process, beginning in October 2021.
Reasons for Risk Rating 2.0
The current risk rating system for the National Flood Insurance Program has been in place for nearly 50 years. It currently uses static measurements as a basis for policyholders’ premium rates. The current program focuses primarily on the flood zone elevation information found on the flood insurance rate map (FIRM).
The new program has taken the current pricing methodology a step further. Under Risk Rating 2.0, FEMA integrated additional flood hazard information, including catastrophe models, private sector data sets, and actuarial science elements.
In addition to property elevation, Risk Rating 2.0 utilizes added these flood insurance rating variables into the premium calculations:
- Flood frequency
- Flood type (e.g., river overflow, storm surge, heavy rainfall, and coastal erosion)
- Distance between a property and water source
- Property rebuilding costs
Current National Flood Insurance Program pricing is outdated and unequal for policyholders. FEMA explained that the current pricing methodology has resulted in inaccurate pricing. Lower-valued homeowners were paying steeper premium costs than their share of flood risk justifies. Conversely, policyholders with higher-valued homes have been paying lower premiums than is warranted by their flood risks.
FEMA recognizes the outdated pricing disparity and uses Risk Rating 2.0 to institute fairer rates for policyholders based on their property characteristics and unique flood hazards. The organization acknowledges that using additional variables and information institutes a “transformational leap forward” in its effort to ensure both accurate and equitable rates across the board.
Flood Insurance Rate Changes With Risk Rating 2.0
FEMA reported that under the current program, policyholders have experienced a premium rate increase of approximately $8 per month each year at the time of renewal.
After implementing the additional flood information and variables into the pricing scheme, Risk Rating 2.0 will affect current National Flood Insurance Program policyholders’ premium rates in the following ways:
- Approximately 23% of policyholders will receive premium rate decreases, paying about $86 less per month.
- Around 66% of policyholders will experience moderate premium increases, with an average $0-$10 increase more per month.
- The final 11% of policyholders will encounter a steeper premium rate increase, with 7% paying approximately $10-$20 more every month and 4% seeing an average of over $20 more each month.
FEMA Flood Insurance Program Factors To Remain
Despite the changes being implemented as part of Risk Rating 2.0, FEMA confirmed that several aspects of the National Flood Insurance Program will remain unchanged:
- Utilizing flood mapping – The FIRM will continue to be utilized in the NFIP pricing scheme, along with the additional flood information and variables.
- Setting limits on rate increases – Statutory limits placed on premium rate increases will remain unchanged. Most rates will not be able to go up by more than 18% every year.
- Offering discounts – A broad range of NFIP premium discounts will still be available to eligible policyholders. This includes, but is not limited to continuous coverage that was grandfathered in, the transfer of policy discounts from one homeowner to the next when the property is sold, and discounts for those policyholders who live in communities that are part of the Community Rating System.
When Will FEMA Risk Rating 2.0 Rollout
FEMA is implementing a gradual approach to carry out the timeline for Risk Rating 2.0. The new system rollout will happen in two main phases:
- Phase 1 – The first phase will begin on October 1, 2021. All new NFIP policies that begin on or after this date will use the pricing scheme outlined in Risk Rating 2.0. Furthermore, current policyholders up for renewal on or after the same date and are eligible for the new reduced premium rate can start paying the reduced costs.
- Phase 2 – The second phase will begin on April 1, 2022. All current NFIP policyholders who have a renewal due on or after this date will use the new pricing outlined in Risk Rating 2.0.
For additional insurance-related resources and updates, contact ALLCHOICE Insurance today.