How Risk Rating 2.0 is Changing Flood Insurance Rates

Flood insurance has been a misunderstood sector of the insurance industry since long before its creation as a monoline product. Before the creation of the National Flood Insurance Program (NFIP) in 1968, flooding was considered an uninsurable peril. Following a devastating period of flooding along the Mississippi River, Congress responded with the establishment of the NFIP to protect property owners from potential flood losses. 

In 1973, the Flood Disaster Act went into law which mandated the purchase of flood insurance for homes in a special flood hazard area (SFHA) if the owner held a federal mortgage on the property. To determine which properties are located in a SFHA, also known as a 100-year floodplain, flood maps were created based on the flood history of a property as well as the elevation of a property in relation to the base flood elevation of the land. These properties are considered to be at a moderate-to-high risk of flooding. 

Understanding the Previous NFIP Rating Methodology

Through the NFIP, flood insurance rates for properties in a SFHA would vary depending on each property’s characteristics. In order to obtain a policy through the NFIP for this type of property, an elevation certificate has been required. This document includes important information on the elevation and foundation of a property that help determine the risk of flood damage and thus can affect the flood insurance premium.

In contrast, properties that lie outside of the 100-year floodplain have always been offered the same annual NFIP premium, depending on the coverage limits requested, despite the flooding risk of each individual property. For example, a beachside or coastal property mapped in a FEMA designated low-to-moderate risk flood zone (known as B, C, or X) would be given the same annual premium as a property located further inland within the same flood zone. 

FEMA Flood Maps Lead to Flooding Misconceptions

The lender requirement for flood insurance has led to decades of misconception surrounding flooding risk. The phrase “not in a flood zone” is often used to describe properties outside of the 100-year floodplain. However, many devastating weather events over the past few years have shown that flooding can happen anywhere and have highlighted the need for changes in FEMA risk modeling and language. For example, when Hurricane Harvey made landfall near Houston, Texas the majority of the area was located in a low-to-moderate risk flood zone and nearly eighty percent of all homeowners did not have flood insurance. 

By law FEMA is required to review flood maps every five years. However, due to lack of funding the organization has not been able to maintain this standard, leading to more than two-thirds of all flood maps to be outdated. Without current flood maps, many property owners are left with a false perception of their property’s true flooding risk and may opt out of securing flood coverage. In turn, the NFIP’s debt has continued to increase and is now at over $20 billion. 

New Changes With Risk Rating 2.0

Enter: Risk Rating 2.0. The new rating methodology was intended for premiums offered by the NFIP to more accurately reflect the true flooding risk and value of each property. Through the new program, properties within low-to-moderate risk flood zones might see an increase in their premium, showing that the property is at greater risk of flooding than what was originally believed. At the same time, those with homes in high-risk flood zones might see rate decreases. In addition to risk-based rates, they are also better reflective of a property’s overall value in an attempt to create equity amongst premiums. However, FEMA estimates that more than 70% of policyholders will see rate increases. 

Previously, FEMA has used historical flooding information as well as elevation data to map large areas of land throughout the country into flood zones. These maps are determined using historical flooding information as well as elevation data. However, Risk Rating 2.0 takes into account more characteristics that directly affect an individual property’s flood risk. These new factors include the type and number of local flooding risks, frequency of flooding events, storm surge, and distance to a water source. 

What Other Options Are Available?

For many property owners there are other flood insurance options available aside from the NFIP. The private flood market has grown exponentially over the past few years, with multiple top-rated carriers offering competitive flood quotes with special coverage options not offered through FEMA. Mortgage companies will accept a private flood policy to meet the insurance requirement, with the exception of FHA loan holders, who are required to continue using the NFIP only. 

New policyholders began to see Risk Rating 2.0 premiums as of October 1st, 2021. Rates will increase for renewal policies beginning April 1st, 2022. To discover what your flood insurance options are, contact our office today for quotes.