Risk Rating 2.0 – What You Should Know
FEMA announced in early 2019 that the National Flood Insurance Program (NFIP) is redesigning the way NFIP policies are rated. This new rating system would be called Risk Rating 2.0 and was initially planned to be released in October 2020. FEMA states Risk Rating 2.0 will be easier to understand and provide more accurate rates for each property’s unique flood risk. The release date of Risk Rating 2.0 has since been pushed back to October 1, 2021.
Current NFIP Risk Rating & Why Risk Rating 2.0 Is Needed
The NFIP was established in 1968 to address increasing flooding events across the country and the lack of flood insurance that was available at the time. Since the establishment of the NFIP, the program’s risk rating has not changed very much. According to FEMA, current Flood Insurance rates for the NFIP are determined by “the amount and type of coverage purchased, location and flood zone, and the design and age of your structure.” Flood zones that property falls into can be located on FEMA’s Flood Maps; in addition to flood zones, these maps show flood plain boundaries and base flood elevation.
A significant factor in revamping NFIP risk rating is the increase in major flooding events over the past 20 years. There have been nine storms since 2005 that have generated at least $1 billion individually in losses for the NFIP, the largest being Hurricane Katrina (2005) which the NFIP paid over $16 billion in claims. Due to these storms, the NFIP loses an estimated $1.4 billion each year and is now $20 billion in debt to the U.S. treasury.
The risk rating currently in place has become antiquated and cannot correctly assess the flood risk in today’s world. A recent study from First Street Foundation found that for about a quarter of a million homes in high-risk areas, a premium increase of at least $10,000 for each property would be needed to price the flood risk adequately. This same study evaluated Charleston, SC properties, stating these homes would need to pay an average premium of $18,211 based on their flood risk. The current average NFIP rate for these same properties is $2,264.
What We Know About Risk Rating 2.0
While much is still unknown about Risk Rating 2.0, FEMA has released some basic information about the new rating system. FEMA has stated that each property’s three characteristics will be the distance to coast or flooding source, different flood risk types, and the cost to rebuild a home. The data for Risk Rating 2.0 will also be coming from at least the following sources:
- FEMA: Existing mapping data, NFIP policy, and claims data;
- Other Federal Government Agencies: U.S. Geological Survey (USGS) publicly-available data;
- National Oceanic and Atmospheric Administration (NOAA) Sea, Lake, and Overhead Surges from Hurricanes (SLOSH) data;
- U.S. Army Corps of Engineers (USACE) data sets; and
- Third-party sources: Commercially-available structural and replacement cost data and catastrophe flood models.
FEMA states that Risk Rating 2.0 will provide rates that will be easier for both policyholders and agents to understand, will take into account more types of flood risks, and utilize the most up-to-date actuarial practices. Risk Rating 2.0 will also offer credits for specific flood mitigation measures: installing flood openings, elevating the structure onto posts, piles, and piers, and keeping machinery and equipment on a level above the bottom level of a structure.
This guide provides the lender with a detailed overview of Force-Placed Insurance. Discussions include features & benefits, history of force-placed insurance, the lender-placed insurance policy, issues with the current force-placed insurance business model and the new Borrower-Centric insurance tracking module along with compliance and vendor management. This is a must-read for any lender using force-placed insurance.
Potential Impacts of Risk Rating 2.0
The significant impact of Risk Rating 2.0 is that property owners will now have specific rates for their property. When a flood occurs, we know that flood waters do not stop flowing once they cross a particular map line. We also know that some country’s geographic areas are much more prone to a significant flooding event than others.
Having rates tailored to each property means that we will no longer see a high-risk property in Montana grouped into the same rate as a high-risk property in coastal Florida. Nor will we see property owners on the same street paying vastly different rates simply because a line on a FEMA map divides the properties.
Risk Rating 2.0 will provide some NFIP policyholders with a premium decrease, while others will see their premiums increase. Those concerned about their premium increasing should note that the current rate increase caps will not be changing as a part of Risk Rating 2.0.
Due to these rate increase caps, properties deemed to necessitate a significant rate increase will see these rate increases spread over several years. These rate increases may make a high-risk property owner consider moving to a private flood insurance carrier. Still, many private carriers have been utilizing the rating variables Risk Rating 2.0 is implementing for years. While these rate caps on increase benefit policyholders, they also mean that even with a more accurate rating system, the NFIP is likely to continue the trend of incurring losses.
Recent major flooding events have caused FEMA to take action and make changes to how NFIP policies are rated to slow down the losses that the NFIP is incurring. While making these needed rating changes, FEMA has also finally acknowledged the confusion that is caused for policyholders and agents by the current rating and mapping systems in place. Until Risk Rating 2.0 is officially rolled out by FEMA, it is difficult to analyze how much this new risk rating system will impact the Flood Insurance industry. Risk Rating 2.0 may be the change needed to help make the NFIP sustainable again, or it may prove to be too little too late from FEMA.