Risk Rating 2.0 - A Much Needed Modernization of Flood Risk Assessments

Private Flood Insurance compliant with all new Final Rule requirements and rates  25-40% lower than NFIP.In this post we dive into Risk Rating 2.0, FEMA's National Flood Insurance Program's new risk model. What began as a program in 1968, FEMA’s National Flood Insurance Program (NFIP), is undergoing a massive modernization effort in order to better assess a property’s flood risk. Risk Rating 2.0, first introduced in 2019, is the first major change to how properties are assessed for flood risk under the NFIP since the early 1970s.

Risk Rating 2.0 will modernize the process. Instead of flood insurance policies being largely based on a property’s elevation level within FEMA’s Flood Insurance Risk Map (FLIP), Risk Rating 2.0 will rely on data from:

  •   Their own existing maps and research into their former policy and flood claims data
  •   Third-party sources such as construction cost data to replace or repair a structure after a major flooding event
  •   Additional government sources such as The U.S. Geological Survey
  •   National Oceanic and Atmospheric Administration
  •   Sea, Lake, and Overhead Surges from Hurricanes
  •   U.S. Army Corps of Engineers

At the most basic level, this new data will allow FEMA to better understand and assess a property’s flood risk in more detail than with the FLIP map method from the early 1970s.

The additional details will allow FEMA to assess the risk of flooding on a multi-faceted level, taking into account flood frequency, proximity to a body of water, potential for storm surges, the potential for heavy rains, coastal erosion patterns, the elevation of a property, and the cost to rebuild after a flooding incident.

How Will This Change Impact Insurers and Policy Holders?

The risk of major flooding events is rising. Since 2005, nine major storms have contributed to at least $1.4 billion in losses per year to the NFIP, growing their debt to the U.S. Treasury to $20 billion.

Read our article: Three Times as Many People in need of Flood Insurance

As a result of the financial impacts of COVID-19, FEMA has decided to roll out Risk Rating 2.0 in two phases:

October 1, 2021: New policies will be reviewed under the new rating methodologies, while existing policyholders eligible for insurance renewals will potentially see decreases in their premiums

April 1, 2022: All remaining policies that have not yet renewed will be subject to the new rating methodology

Under Risk Rating 2.0, perhaps the most critical change for policyholders is the addition of the cost to rebuild variable, which will more fairly distribute insurance premiums among homeowners. Those with lower-value homes will see their premiums adjusted, likely lower. Those with higher-value homes will likely see an increase in premiums. However, these premiums will be capped per the current annual premium increase statutory limits.

Read our related article: Three Times as Many People in need of Flood Insurance than Current FEMA Maps Show

For insurance agents, these changes also offer the opportunity to add increased discounts for clients that take flood mitigation measures. For example, including the installation of flood openings, keeping home mechanicals, machinery, or other expensive equipment that would require replacement after a flood, out of the lower levels of a home where they would be most at risk. In potentially high flood risk areas, elevating the entire structure onto piles, piers, or posts.

What Will Not Change

  • Using Flood Insurance Rate Maps (FIRMs)
  • FIRMs will continue to be used to inform floodplain management, to help plan building requirements in communities, and to inform catastrophic flood event planning. They will also still be used to inform a portion of policy rates under Risk Rating 2.0
  • Annual Premium Statutory Limits
  • Existing statutory limits will still remain in place, with rate increases, in most cases, not being above 18% per year.
  • Premium discounts will continue to be offered on newly mapped, continued coverage, or pre-FIRM subsidized policies.
  • When a property changes ownership, policyholders will still be able to transfer their flood insurance policy discount to a new owner.
  • Discounts for policyholders in communities that participate in the Community Rating System will continue.

Overall, Risk Rating 2.0 may not only allow FEMA to slow the losses the NFIP policies are currently incurring but could also be a positive change for many flood insurance policyholders who are unfairly paying high premiums. Often times the borrower will seek guidance from their lender when flood insurance is required for a loan. It's important to know about these new changes and be aware that private flood may be a better solution in some instances. 

Read our related article: Three Times as Many People in need of Flood Insurance than Current FEMA Maps Show

If your community participates in the National Flood Insurance Program, Unitas Financial Services can help you (the lender) supply flood insurance to your borrowers. 

At Unitas, we know that community banks and credit unions are a driving force in their community’s success. That’s why we develop innovative, fully customizable portfolio protection programs and other financial products for lenders enabling them to remain strong, efficient, and protected as they continue to grow and enrich their communities. 

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