On Oct. 1, 2021, FEMA began implementing a new flood insurance pricing methodology called Risk Rating 2.0. The rate changes affect new flood insurance policies but will not apply to existing policies until April 1, 2022. It is already clear that Risk Rating 2.0 is producing National Flood Insurance Program (NFIP) rates that more accurately reflect each home’s specific flood risk, but some owners of higher value properties have expressed concern. Here’s what you need to know:
1. Risk Rating 2.0 replaces an inaccurate system that has not been updated in half a century and is not sustainable for homeowners or taxpayers. If FEMA does not make these changes, NFIP rates will continue to climb 18% – 25% per year until reaching a top rate of $63,000 for a $250,000 home.
2. Risk Rating 2.0 rates each home individually—rather than by flood zone—using more risk factors and property-specific characteristics including elevation, distance to water, and cost to rebuild. To develop this methodology, FEMA collaborated with dozens of PhD experts and scientists while leveraging modern insurance industry technologies, standards and science.
3. Some rates could increase while others decrease depending on each building’s replacement value and individual risk profile. The difference is, under the old system, the subsidies were hidden, but now people will have access to more accurate insurance cost information upfront.
4. Because each property is now rated individually, only a licensed insurance agent will be able to tell your clients how their rate will change under the new system. While flood insurance is outside real estate licensure and training, you can help clients identify qualified insurance and flood risk professionals.
5. REALTORS® have been calling for these changes since Congress passed the Biggert-Waters Flood Insurance Reform Act in 2012. After working with Congress to delay the excessive rates, NAR formed a member insurance committee to hire actuaries and work with FEMA to diagnose the problem and propose solutions. FEMA adopted most of the committee’s recommendations, and NAR has announced its support for Risk Rating 2.0.
What’s Not Changing Under Risk Rating 2.0
1. Risk Rating 2.0 applies only to risk-based NFIP rates and will not affect flood mapping or insurance requirements, which will continue to be enforced by Congress, local communities and lenders.
2. Grandfathered rates, including for newly mapped and pre-FIRM subsidized properties, will continue. By law, increases will not be more than 18% per year.
3. Policyholders will still be able to transfer their discounts to buyers by assigning their flood insurance policy at the time of property sale.
Risk Rating 2.0 is the culmination of thousands of NAR member hours and research dollars. It will produce more accurate, science-based rates, and FEMA is committed to continuing to work with us as issues emerge and adjustments are needed. The outcome is a big win for consumers and a powerful example of your RPAC dollars at work.
For more information about FEMA Risk Rating 2.0, visit https://www.nar.realtor/national-flood-insurance-program/fema-risk-rating-2-0-equity-in-action.
Austin Perez is a senior policy representative on insurance issues for the National Association of REALTORS®.