FEMA Updates Risk Rating for National Flood Insurance Program

A new rating system for flood insurance was recently reviewed during a webinar by the Federal Emergency Management Agency and the Pennsylvania Emergency Management Agency.

Risk Rating 2.0 was designed by FEMA to modernize the National Flood Insurance Program’s insurance pricing methodology and more accurately tie its rates to the flood risks of individual properties.

Of the more than 51,000 NFIP policies in Pennsylvania, more than half (56%) of policyholders will see an average of up to $10 monthly increase on their policies with Risk Rating 2.0, according to Richard Sobota, FEMA Region 3 senior flood insurance specialist. These increases are consistent with what policy holders experienced under the legacy rating system. Thirty percent of Pennsylvania policyholders will see an immediate decrease in their policy fees; 7% will see an increase of $10 to $20 per month and 7% will see a greater than $20 per month increase.

Risk Rating 2.0 is the first significant update to the NFIP rating methodology in almost 50 years and will begin to take effect on Oct. 1, 2021, for new NFIP policyholders and existing policyholders who may want to opt in to take advantage of immediate decreases in their premiums. All other existing policyholders will receive the new rates at the time their policy renews after April 1, 2022.

Pennsylvania NFIP policyholders fair slightly better than the national rate analysis, where 66% of policyholders will see a slight increase of up to $10 per month. On average, 23% will see a decrease, with 7% on average are expected to see an increase of $10 to $20 per month, and 4% will see $20 or more per month increase.

The new flood insurance pricing methodology uses new criteria to rate flood risk:

• Uses actuarial and data science to index risk to a key set of rating variables
• Is “geospatially aware,” accounting for distances to flooding sources and the concentration of policies in an area
• Uses multiple elevation reference points, e.g. elevation relative to flooding source (coastal/riverine hazard) and elevation relative to surrounding elevation (pluvial)

“We’re moving away from a binary method of rating to a more graduated view of risk,” Sobota said. “The question is not – am I in or out of the floodplain, but what is my actual level of risk?”

Realtors® should be aware that a prospective buyer can obtain a flood insurance rate quote to assist with their overall financial considerations to determine their ownership costs with Risk Rating 2.0. Additionally, lenders can determine the cost of a “mandatory purchase” flood insurance policy earlier in the loan underwriting process. Insurance agents will have access to a “rating engine” to use in providing flood insurance rate quotes.

“This is going to change the nature of the process. The cost of flood insurance can be a significant factor in a real estate transaction and a determinate of whether or not a buyer can afford to purchase a property,” Sobota said. “The ability to come up with a flood insurance quote earlier in the process will be beneficial to everyone.”

Risk Rating 2.0 will provide equity and ensure individuals no longer pay more than their share in flood insurance premiums based on the value of their homes. Replacement value will be used in determining the cost of the flood insurance policy. The current rating methodology uses: FEMA-sourced data, flood insurance rate map zone, base flood elevation, foundation type, structural elevation and 1% annual chance of flooding.

The new system uses: FEMA-sourced data, federal government-sourced data, commercially available third-party data, cost to rebuild, distance to coast/ocean/river, stream order or river class, flood type (fluvial/pluvial), ground elevation, first floor height, construction type/foundation type and a broader range of flood frequencies.

For more information visit: Risk Rating 2.0: Equity in Action | FEMA.gov.