Congress Has Just Two Days To Reauthorize The National Flood Program

What is NFIP Risk Rating 2.0? Here’s Everything You Need to Know

UPDATE: FEMA has delayed its revamping of the flood risk rating structure until October 2021.

Earlier this year, David Maurstad, Chief Executive of the National Flood Insurance Program (NFIP), announced a new, easier to understand rating structure for the NFIP called Risk Rating 2.0 to make it simpler to purchase flood insurance and improve the policyholder experience. According to FEMA, Risk Rating 2.0 will help make this a reality by, “leveraging industry best practices and current technology to deliver rates that are fair, easy to understand, and better reflect a property’s unique flood risk.”

Maurstad is calling the new system a “game-changing initiative for the NFIP.” But what is NFIP Risk Rating 2.0? How will it help you and other homeowners like you ensure your home is protected if the worst happens? Fema recently released the following information to help you understand what’s changing:

What's Changing?

Risk Rating 2.0 will fundamentally change the way FEMA rates a property’s flood risk and prices insurance. The current rating methodology has not changed since it was first developed in the 1970s. But since then, technology has evolved and so has FEMA’s understanding of flood risk.

Additionally, the current rating methodology is heavily dependent on the 1-percent-annual-chance-event, while Risk Rating 2.0 will incorporate a broader range of flood frequencies. FEMA will be pairing state-of-the-art industry technology with the NFIP’s mapping data to establish a new risk-informed rating plan. Catastrophe models, in combination with the ability to leverage the NFIP’s mapping data, will provide a better and more comprehensive understanding of risk at both the national and local level.

FEMA is building a new rating engine to help agents easily price and sell policies. It will also allow policyholders to better understand their property’s flood risk and how it is reflected in their cost of insurance.

New rates for all single-family homes will go into effect nationwide in October 2021.

Risk Rating 2.0 will comply with existing statutory caps on premium increases. This will help transition policyholders who may face otherwise substantial rate increases.

What are the benefits of Risk Rating 2.0?

The NFIP is developing Risk Rating 2.0 to deliver the following key benefits to policyholders, communities, and the flood insurance industry:

  • Creates an individualized picture of a property’s risk Provides rates that are easier to understand for agents and policyholders
  • Reflects more types of flood risk in rates
  • Uses the latest actuarial practices to set risk-based rates
  • Reduces complexity for agents to generate a quote

What are the new rating characteristics?

The new risk rating plan will use easier-to-understand rating characteristics for each property, such as:

  • Distance to the coast or another flooding source
  • Different types of flood risk
  • The cost to rebuild a home

By reflecting the cost to rebuild, the new rating plan will also aim to deliver fairer rates for owners of lower-value homes.

Answers to Commonly Asked Questions

1. What data sources is FEMA using for this initiative? Where are the data coming from?

FEMA is using a combination of models to support the development of rates. We are pairing state-of-the-art industry technology (e.g. catastrophe [CAT] models) with the NFIP’s mapping data to establish a new risk-informed rating plan. Combined data from CAT models and NFIP mapping data will provide a better and more comprehensive understanding of risk at both the national and local level.

FEMA is using data from multiple sources, such as:

  • 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.

This is not a complete list of all data sets and FEMA may add additional data sets in the future.

2. How does FEMA plan to encourage homeowners to maintain their flood insurance coverage?

We believe that Risk Rating 2.0 will help close the insurance gap across the country. We believe that fairer, more intuitive rates will help future and current policyholders understand their risk, their premium, and their coverage options. FEMA plans to offer mitigation credits to help incentivize risk reduction efforts and reduce the cost of future flood events.

Risk Rating 2.0 will initially provide credits for three mitigation actions:

  • Installing flood openings per the 44 CFR 60.3 criteria;
  • Elevating onto posts, piles, and piers;
  • Elevating machinery and equipment above the lowest floor.

3. Do changes from this initiative require legislative action or approval of Congress?

Since 1968, the National Flood Insurance Act has required FEMA to periodically review, and if necessary, revise the way we set non-discounted premium rates. FEMA has always followed the congressional mandate to set non-discounted premium rates based on accepted actuarial principles. By leveraging modern technology and advanced actuarial practices, Risk Rating 2.0 is helping FEMA better meet the objectives already laid out by Congress.

4. What percentage of policyholders would expect to see increases in premiums? What percentage would see premiums go down?

FEMA is completing an actuarial analysis and does not have this information at this time. FEMA is committed to implementing Risk Rating 2.0 in a transparent way and will continue to communicate information as it becomes available.

Where Can I Learn More?

To learn more about Risk Rating 2.0 and to get the most up-to-date information, please visit www.fema.gov/nfiptransformation.

To download FEMA’s “Risk Rating 2.0 Overview” in its original form, please click here.

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