FEMA to update the National Flood Insurance Program's risk rating

Jim Karlovsky

What is Risk Rating 2.0?
As a part of its efforts to build a culture of preparedness and close the insurance gap, FEMA is working to change the way it rates a property’s flood risk and prices insurance. FEMA’s intent is to improve the experience for policyholders by simplifying the process and delivering rates that better reflect the unique risk of each property. 

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.  

How will Risk Rating 2.0 impact flood insurance rates?
Risk Rating 2.0 will change the way FEMA rates flood risk and prices insurance by incorporating updated technology and a more comprehensive understanding of risk.

FEMA intends to realize the latter by looking at new factors that portray real risk, including different types of flooding that impact a property, the distance a property is from the coast or another flooding source, and the cost to rebuild or restore that property. This will allow for unique rates that accurately reflect an individual property’s risk. After all, why would a homeowner pay for insurance that is blind to the actual value of the property being insured? Depending on the coverage, this could lead to the homeowner being grossly underinsured — or paying rates that are excessively high for unnecessary coverage. FEMA hopes to remedy this inequity.

The new risk rating will be a departure from FEMA’s current methodology, which dates back to the 1970s and is based primarily on Flood Insurance Rate Map zones and Base Flood Elevation. Risk Rating 2.0 will contain a broader range of frequencies to measure flood risk. This more nuanced approach will move away from the binary “one-size-fits-all” approach of current flood maps, where rates may differ dramatically from one zone to the next on rate maps.

Risk Rating 2.0 will also improve the experience for policyholders by making the NFIP easier to understand. The current process can be confusing to navigate. According to FEMA, a new rating system will be rolled out to assist insurance agents in pricing and selling policies. The system will also allow homeowners to more clearly understand flood risk and the methodology behind their insurance rate.

What are the benefits of Risk Rating 2.0?
According to FEMA, the benefits of the new initiative include:
- 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
- A simplified process for insurance agents to produce quotes

Contact your insurance company or insurance agent to learn more about what Risk Rating 2.0-Equity in Action means for you.

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