Changes in Flood Insurance Pricing Arrives with Risk Rating 2.0

The National Flood Insurance Act, established in 1968, calculates the premiums that homeowners pay for flood insurance. Beginning on October 1, 2021, this will change with the arrival of Risk Rating 2.0.

Risk Rating 2.0 is a new pricing methodology and update to the National Flood Insurance Program (NFIP). According to the FEMA website, Risk Rating 2.0 “delivers rates that more accurately reflect flood risk and ensure the National Flood Insurance Program will be here for generations and generations to come.” 

The risk, in 1968, was determined by which flood zone the home was located within FEMA’s Flood Insurance Rate Map. Risk Rating 2.0 looks at each home individually and not just by the flood zone. Variables such as flood frequency, multiple flood types (river overflow, storm surge, coastal erosion, and heavy rainfall) and the distance to a water source (coast or other known flood sources). Other property characteristics, such as elevation and the cost to rebuild, are also taken into consideration; while elevation certificates are not necessary, they can be used optionally, if it helps to achieve lower insurance rates. 

FEMA’s goal is to “equitably distribute premiums across all policyholders based on home value and a property’s unique flood risk,” according to the National Flood Services website (NFS). Risk Rating 2.0 is considered a long-overdue update; there were instances where lower-valued homes were paying more than their share of the risk, while higher-valued homes were paying less than their share of the risk. Risk Rating 2.0 falls more in-line with the modeling of private flood insurance.

Phase I is for all new flood insurance policies with a start date of October 1, 2021. These policies will be subject to the new rating methodology. Any existing policyholders that are eligible for renewal and would experience immediate decreases can take advantage of Risk Rating 2.0.

Phase II is for all remaining policies that renew on or after April 2, 2022. Those policies will be subject to the new Risk Rating 2.0 methodology.

While higher flood insurance prices may be on the horizon, existing statutory limits do not allow an increase of more than 18% to 25% per year. NFS states that when a policy renews into Risk Rating 2.0, even though the full-risk premium may go up more than the cap percentage, “the paid premium will include a discount for the annual cap rate, creating a glidepath to the full-risk premium.” In other words, there will be an increase of no more than 18% or 25% per year until the policy achieves the full-risk premium determined under Risk Rating 2.0. This also applies to any policy that is assumed from a current owner to a buyer. The glidepath process could take up to 10 years.

Some questions arise with these changes: Does this limit a prospective buyer’s ability to qualify for a home loan because of a change in their debt-to-income ratio? What are the impacts to new construction and tear downs? Is there a glidepath or do they jump right into Risk Rating 2.0 pricing?

FEMA understands that there are going to be adjustments and is asking for examples so they can be fixed and implemented into the new system. The big takeaway is that a flood insurance company is your best bet in finding what kind of Risk Rate 2.0 pricing can be expected for your property.

For more information visit https://www.fema.gov/flood-insurance/risk-rating .