New Flood-Insurance Rating System Starts October 1
A new flood-insurance rating system, designed to make rates reflect the true risk to an individual property will go into effect on October 1. FEMA calls it their Risk Rating 2.0 system. They describe it as Equity in Action. It’s FEMA’s attempt to put the National Flood Insurance Program (NFIP) on a sound actuarial footing and stop the system’s financial hemorrhaging.
Says FEMA, Risk Rating 2.0 is “not just a minor improvement, but a transformational leap forward. Risk Rating 2.0 enables FEMA to set rates that are fairer and ensures rate increases and decreases are both equitable.”
Based on More Data, More Variables
“The new system moves away from basing price primarily on a handful of broadly drawn and often dated flood map zones,” according to the Pew Charitable Trusts. The new rates reflect “a more detailed set of factors, including proximity to and size of a water source, flood frequency and type (such as heavy rainfall or coastal erosion), ground and building elevation, foundation types, and drainage issues.”
Sliding Scales not Price Brackets
“The more detailed analysis allows for prices that run along a sliding scale,” says Pew, rather grouping homes into brackets because they’re in the same mapped zone. Thus, low-risk homes will no longer be carrying the freight for high-risk homes.
Under Risk Rating 2.0, policyholders can save through mitigation activities such as elevating mechanical and electrical equipment above flood levels or installing flood openings.
Also, under the old system, all National Flood Insurance policy holders paid the same base rate. However, they could purchase additional insurance at substantially discounted rates. Thus, more expensive homes enjoyed an advantage over less expensive homes. But the new system will attempt to correct that imbalance.
Risk Rating 2.0 also gives policy holders savings for practical mitigation activities, such as elevating mechanical and electrical equipment above flood levels or installing flood openings.
So far, so good. Congress mandated the change to actuarily sustainable rates in 2012. At the time, people thought the rates would also help discourage development in flood prone areas.
Not Everyone Happy with New System
Not everyone is happy with the system, however. The Sugar Land City Council unanimously approved a resolution during an Aug. 3 meeting stating its opposition to Risk Rating 2.0. They expect it to result in increased flood insurance rates for the vast majority of policyholders in Fort Bend County.
A google search turned up many news stories about fears of massive rate increases. However, by law, most new rates may not increase by more than 18% per year, according to FEMA.
Gap Between Policies and Practice, At Least Initially
Still, several insurance companies have pointed out hidden inconsistencies between policy and practice in the new system.
NU Property Casualty 360, for instance, pointed out several hidden inconsistencies that undermine the equity goal. They include:
- A new artificial rate cap. Under Risk Rating 2.0, regardless of risk, policyholders will never pay more than $12,125 per year. This effectively creates a subsidy that encourages development in the most flood-prone areas.
- Rates still do not align with risk. Current policy holders will not be penalized for any losses during the past two decades. That said, the artificially low rate will immediately increase to reflect actual risk after the first claim under Risk Rating 2.0. For a period at least, the NFIP provides no way for homebuyers to discover the flood-loss history of a structure.
- Rate discounts unrelated to specific risk will continue. The NFIP’s Community Discount System will continue to provide community-wide premium reductions regardless of an individual property’s risk. These reductions impact more than 70% of NFIP policies and provide discounts of up to 45% to every structure in the community regardless of actual risk.
- There are still no refunds for many policyholders who want to trade up. Once an NFIP policy has been in force for more than 30 days, the NFIP will not allow a refund to a policyholder who cancels an NFIP policy and replaces it with private coverage.
Pushback from Politicians
Several senators and congress people have complained about the new system and asked to delay the rollout to study impacts more closely.
The influential, Washington publication “The Hill” published a scathing op-ed of Risk Rating 2.0 in May. The author, Jainey Bavishi, director of the NYC Mayor’s Office of Climate Resiliency, felt that rising costs would force many to let flood-insurance policies lapse. She called the rollout “rushed.” She claimed, and I quote, the new policy “threatens to transform the National Flood Insurance Program from a financial lifeline into a crippling financial burden for thousands of low-income families in coastal cities.”
Phased-In Changes
Any change this massive was bound to cause political indigestion. FEMA has heard the criticisms and is trying to roll out the new system in a way that minimizes hardships. For instance, existing policies will be on an 18% “glide path” to their full risk rate. Said another way, FEMA will phase in the increases to make them more bearable. They will also give discounts for flood proofing, adding flood vents beneath homes, elevating homes and much more.
For policy holders in multi-floor apartment buildings, FEMA will now consider the actual floor you live on, not just quote a flat rate for everyone in a building. This should benefit renters who live on upper floors.
Timing
PHASE I
New policies beginning Oct. 1, 2021, will be subject to the new rating methodology. Also beginning Oct. 1, existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums.
PHASE II
All remaining policies renewing on or after April 1, 2022, will be subject to the new rating methodology.
Get a Quote From Your Insurance Agent
In its efforts to make pricing reflect true risk, FEMA will now consider many new data sources and variables. I reviewed an hour-long FEMA presentation on the subject. At the end, I was left with one overwhelming conclusion. Call your insurance agent. Your price may go down. It may go up. It costs nothing to get a quote. But the cost of NOT having insurance when you need it can break the bank as we saw during Harvey and Imelda.
Of the 154,170 homes flooded in Harvey, 64% did not have a flood insurance policy in effect.
Posted by Bob Rehak on 9/20/2021
1483 Days since Hurricane Harvey and 732 since Imelda
