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The Federal Emergency Management Agency has changed the way it calculates National Flood Insurance Program premiums for renewing homeowners. Called Risk Rating 2.0, it takes into account a variety of risk factors when setting flood insurance rates and is designed to make premiums more equitable.

FEMA estimates that 77% of policyholders will see some type of premium increase while 23% will see a decrease. 

A few states, mainly coastal, will see a large percentage of the rate increases – with 80% of Florida's policyholders getting an increase in flood insurance costs.

FEMA rolled out the new pricing methodology in two phases. In the first phase, new policies as of Oct. 1, 2021, are subject to the Risk Rating 2.0 rating methodology.  In the second phase, which began April 1, 2022, all renewing policies are subject to the new rating methodology.

What follows is an overview of the new Risk Rating 2.0 system and what you can expect in regard to premium increases or decreases.

Why are flood insurance rates going up?

Flood insurance rates are rising now for many homeowners as FEMA transitions to Risk Rating 2.0.

The new methodology, FEMA says, lets it fairly distribute premiums for policyholders based on the value of their home and their property’s unique flood risk. Right now, according to FEMA, many policyholders with lower-value homes are paying more than they should while others with higher-value homes are paying less than they should.

The agency says it’s implementing the new methodology now because it’s obtained the capability and tools to incorporate more flood risk variables, such as flood frequency, distance to a water source, a property’s elevation and the cost to rebuild a structure.

In addition to the FEMA changes, climate change has resulted in more frequent and severe storms, leading to more flood claims that almost always result in higher premiums. In 2021, there were 20 weather and climate disaster events with losses exceeding $1 billion in the United States, according to the National Oceanic and Atmospheric Administration. The annual average from 1980 to 2021 was 7.7 events. As severe weather becomes more frequent, flood insurance rates will continue to rise.

But it’s worth noting that flood insurance rates have been subsidized for decades and have rarely reflected the property’s actual risk. Risk Rating 2.0 is designed to correct that.

What is FEMA Risk Rating 2.0?

FEMA is simply changing how it calculates flood insurance premiums for the National Flood Insurance Program, or NFIP, and the agency is calling the new system Risk Rating 2.0. The  former methodology for calculating flood insurance premiums had not changed significantly since 1968.

Prior to Risk Rating 2.0, premiums were determined by where a home fell on FEMA's flood insurance rate map and the property’s elevation – taking no other risk factors into account – which resulted in premiums that often fell far below the actual cost to insure the home. Due in part to climate change and more frequent and destructive storms, the NFIP decided that the old method for calculating flood insurance premiums was no longer viable.

Risk Rating 2.0 takes a variety of risk factors into account, which should result in premiums that more accurately reflect the risk of flooding for a given property. The new rating factors increases  the cost of flood insurance for some homeowners while others will see a lower premium.

How does FEMA Risk Rating 2.0 work?

Risk Rating 2.0 is designed to make premiums more equitable. It incorporates private sector data sets, catastrophe models and evolving actuarial science to properly rate the risk of flooding to a home. It looks at a variety of data, including frequency of storms, distance to a flooding source such as an ocean or river and the cost to rebuild or repair the home. Flood insurance premiums now reflect more of the real risk the home presents.

How is it different from the previous flood insurance rating system?

FEMA's rating methodology had not changed in decades and was based on static data, such as a home's elevation and where the property landed on the FEMA flood zone map. This methodology was not specific to a home's individual risk factors and often resulted in premiums that did not accurately reflect the flood risk the home represented.

Risk Rating 2.0 change that by considering a variety of variables and risk factors when setting a flood insurance premium. It no longer only looks at a home's location on a flood map but includes other factors that can lead to flooding, such as:

  • Nearby rivers that may overflow
  • Frequency and severity of storm surge
  • Frequency of heavy rain
  • Local coastal erosion
  • Distance from a water source
  • The size of the home and cost to rebuild

Who is setting these rates?

The Federal Emergency Management Agency has developed new flood insurance rates using a variety of data sources. The data, according to a Congressional Research Service summary,  takes into consideration existing NFIP map data, NFIP policy and claims data, United States Geological Survey 3-D elevation data, National Oceanographic and Atmospheric Administration (NOAA) storm surge data, as well as U.S. Army Corps of Engineers datasets.

While FEMA collects the data and sets the rates, policies are sold via the National Flood Insurance Program. FEMA underwrites flood insurance coverage and administers the NFIP in partnership with the federal government, as well as the property insurance industry and state and local officials.

The NFIP is currently the largest single-line insurance program in the country with more than 5 million policyholders across the country and roughly $1.3 trillion in flood insurance coverage on the books.

Does anything stay the same under Risk Rating 2.0?

There are a couple of major components of NFIP policies that are not changing. Under Risk Rating 2.0, the requirement to purchase flood insurance if your home is in a high-risk flood area or a Special Flood Hazard Area  stays the same. In addition, lenders still have the right to require flood insurance on properties they hold a mortgage on if they feel there is a flood risk.

The federal premium cap that limits rate increases to 18% per year also stays in place. FEMA is continuing to offer premium discounts for preFIRM subsidized and newly mapped properties and policyholders are still able to transfer their discount to a new owner when selling their property. A PreFIRM building is one in which construction or substantial improvement was made on or before Dec. 31, 1974, according to FEMA’s website, or before the effective date of an initial Flood Insurance Rate Map (FIRM).

What areas of the country will see the biggest flood-insurance changes?

In general, states where severe weather is common will see the biggest increases in flood insurance costs. These states, according to FEMA data, will see 80% or more of their policyholders paying more:

  • Hawaii: 87% of NFIP policyholders will see a premium increase.
  • Texas: 86% will see an increase.
  • Mississippi: 84% will see an increase.
  • West Virginia: 83% will see an increase.
  • Florida and Louisiana: 80% of policyholders in these two states will see an increase.

On the other side of the coin, Alaska will see 84% of its policyholders pay less for coverage. The District of Columbia is a close second with 72% of policyholders seeing a decline in premium rates.

How much will my NFIP rates go up?

Your specific rate increase or decrease will vary depending on your home’s location, as well as other risk factors. However, FEMA projects the following when it comes to rate increases and decreases due to Risk Rating 2.0:

  • 66% will see an increase of up to $10 per month.
  • 7% of current policyholders will experience a $10 to $20 per month increase.
  • 4% will see a monthly increase of more than $20.
  • 23% of current policyholders will experience a premium decrease.

Is there a chance my rates could decline?

Yes, absolutely. As stated above, FEMA estimates that 23% of policyholders will experience a premium decrease under Risk Rating 2.0. Homes that are located farther away from a body of water will most likely see a decline, as will smaller homes.

How will flood insurance premiums change in counties with the most flood insurance policies?

Most counties and states that have a large number of flood insurance policies on the books will see more premium increases than states or counties with fewer policies. This is because there are likely many more flooding risks in states where flood insurance is widespread.

As an example, according to FEMA data, Florida currently has the largest number of NFIP policies in place with roughly 1.7 million in force across the state. FEMA predicts that only 20% of those policies will see a rate decrease while the other 80% will be paying more for coverage.

On the other hand, Alaska, which only has 2,300 policies in force, will only see premium increases on 14% of them – the rest will see a decrease. If you are looking for information regarding your state or county, check out this FEMA data.

FAQs: FEMA Risk rating 2.0

What is the difference between preferred and regular flood insurance?

The big difference between a preferred risk policy and a regular flood insurance policy is the price you pay for coverage. The coverage provided by the policy itself is the same. All things being equal, you will pay a lower premium for a preferred risk policy compared with a standard policy. This is because preferred-risk homes are located in areas that are less likely to experience a flood loss.

However, you must qualify for a preferred policy. To qualify, your home must be in the moderate-risk B, C, and X zones in the National Flood Insurance Program (NFIP) Regular Program communities. It cannot be in a Special Flood Hazard Area (SFHA).

What is not changing under Risk Rating 2.0?

There are a few things that are staying the same. Under federal law, if a home is located in a high-risk flood area or a Special Flood Hazard Area, the property owner is required to purchase flood insurance.

In addition, the rate increase limit is still in effect, which means that premiums on an NFIP policy can only increase 18% per year.

The last thing to stay the same is the coverage limits for each policy. NFIP has always had limits to their coverage, which means that if you cannot purchase enough coverage to fully insure your home, you may have to supplement it in the private market. 

Current NFIP coverage limits are:

  • The maximum for residential structures for a family of one to four is $250,000 in building coverage and $100,000 in contents coverage. For residential structures of five or more units, the maximum is $500,000 in building coverage and $100,000 in contents coverage.
  • The maximum for businesses is $500,000 in building coverage and $500,000 in contents coverage.

When does Risk Rating 2.0 go into effect?

It has already been in effect for months for some homeowners (Phase 1 began Oct. 1, 2021) while others started to see changes in April 2022.  

Why should policyholders renew their flood policy?

Regardless of whether you see a premium increase or decrease, you should absolutely renew your flood insurance policy if your home is at risk for flooding. In some cases, it may be mandatory. Federal law requires it if your home is in a high-risk flood area or a Special Flood Hazard Area. Even if the feds don't require it, your lender may, if it is uncomfortable with the flood risk of your home, require flood insurance.

Even if it isn't required, you should consider renewing your policy. Flood damage can happen quickly and be shockingly expensive to repair. A standard homeowner policy does not cover water damage due to flooding, so if your home is severely damaged or destroyed after a flood, you will be on the hook for those costs.

Flood insurance policies take 30 days to take effect. If you let your policy lapse, you will be without coverage for at least 30 days while you wait for a new policy to provide coverage.