For the past 50 years, the Federal Emergency Management Agency (FEMA) has used the same flood risk methodology for calculating insurance premiums. The previous methodology, introduced as part of the National Flood Insurance Act of 1968, calculated homeowner’s risk by analyzing what flood zone their home is in using FEMA’s Flood Insurance Rate Map. But climate change demanded a revision.
Due to climate change, this half-century-old approach no longer reflects a property’s unique flood risk. In fact, a staggering 70% of American homeowners are at risk of flooding. FEMA recently introduced Risk Rating 2.0, a new pricing methodology for insurance premiums. Rather than relying on flood zones, the National Flood Insurance Program (NFIP) will assess the risk of each individual property. The premium increases started going into effect for existing policyholders on April 1, 2022. New policyholders and those experiencing premium decreases started seeing changes take effect in October 2021. You’ll likely see more reasonable insurance rates that reflect a property’s flood risk, and more accurate flood maps. So, what exactly does this mean?
What is Risk Rating 2.0?
Risk Rating 2.0 aims to reflect the unique risk of each property accurately. Before Risk Rating 2.0, insurance rates would differ dramatically from one zone to another – even if the properties were located across the street from one another. It’s important to know that FEMA’s flood zones will determine whether a property with a mortgage needs flood insurance. Under the previous methodology, many mortgage lenders were legally mandated to require homeowners to purchase flood insurance. However, with Risk Rating 2.0, the insurance premiums for each property will be based on individual risk variables such as:
- Type of water sources (e.g. river, lake, coast, etc.)
- The distance from the coast or other flood source
- Flood frequency
- Flood types (e.g. flash floods, river floods, etc.)
- Property characteristics (e.g. cost to rebuild, elevation, etc.)
According to FEMA, the benefits of Risk Rating 2.0 are:
- A more accurate picture of risk at the individual property level
- Rates that are easier for policyholders and insurance agents to understand
- Reflection of more types of flood risk than is currently shown
- Use of up to date actuarial practices to set rates
How will Risk Rating 2.0 impact flood insurance rates?
Under the previous methodology, homeowners could be underinsured while others are paying higher rates for unnecessary coverage. The goal of Risk Rating 2.0 is to ensure that premiums are based on the home’s flood risk. The FEMA flood zone will still determine whether a property is required to have flood insurance, but the premium rates will be based on the individual characteristics of the property, such as proximity to water, rebuild cost, and flood type.
Homes that are not near a flood source and have lower repair costs will likely see a decrease in rates. Properties in high-risk and coastal areas with higher repair costs will likely see an increase in premium. FEMA will comply with existing statutory caps on premium increases, meaning homes won’t experience a year-over-year price hike more than 18%. If you see a significant rate increase from the changes from Risk Rating 2.0, FEMA has programs to offer discounted rates.
FEMA estimates that about 66% of insurance policies will see a $0-$10 premium increase per month, and about 23% will see a decrease of $86 per month, on average. About 7% of customers could see an increase of $10-$20 per month, and the remaining 4% may see premiums increase by $20 or more. FEMA insures more than 5 million policyholders.
Who is most affected by FEMA’s new pricing methodology?
Nearly 90% of flood-insurance policyholders in Texas, Florida, and Mississippi are experiencing increases. Historically, these states have had relatively low flood insurance premiums because most homes are built to withstand flooding with little access for water to enter and accumulate. New homes are often built on concrete columns rising above the ground.
Majority-Hispanic neighborhoods will also see the highest share of price hikes, with 84% of policyholders facing increases. This is primarily due to the fact that Texas and Florida have the largest Hispanic populations behind California.
Below is FEMA’s estimated breakout of the current number of affected policies and the projected dollar amount change with new policies in place:
|Rate Change (per month)||Policies Affected|
|$10 or less||3,323,350|
|Between $10 and $20||330,516|
|Greater than $20||192,836|
Private flood insurance vs. NFIP costs and coverage
Flooding is one of the most common and costly disasters a homeowner may face, and an increase in natural disasters makes flooding a major concern across the U.S. Still, many people don’t have flood insurance. Whether you’re living in Los Angeles, CA, or Miami, FL, floods can happen anywhere, and the number of homes at risk of flooding increases every year. Even if your home is not in a high-risk flood zone, you should consider getting flood insurance.
You can obtain flood insurance through a private flood insurance plan or, if available in your area, through the NFIP. NFIP is funded and backed by the federal government, which FEMA oversees. Find out if your insurance provider participates in NFIP, or call your provider to inquire about adding flood insurance to your policy. Below are the key differences between NFIP and private flood insurance coverage:
|NFIP||Private Flood Insurance|
|Max rebuild cost||$250,000||Typically up to $500,000 or higher|
|Availability||All 50 states||May be limited in higher-risk areas|
|Elevation certificate required||Not required||Not required|
|Waiting period||30 days||15 days|
|Building coverage||Up to $250,000||Replacement cost|
|Contents coverage||Up to $100,000||Replacement cost|
|Loss avoidance coverage (sandbags, etc.)||No||Yes|
Check out your state’s Risk Rating 2.0 profile for further explanation of the impacts the new methodology will have in your specific state.