For decades federally backed flood insurance rates have been calculated using a dated system, based on an old understanding of flood risk. What that has meant is that some policyholders covered by the National Flood Insurance Program (NFIP) whose properties have lower flood risk have been paying too much while others with higher flood risk haven’t been paying enough.
Now it appears that the government is on the verge of correcting that imbalance: Earlier this year, the Federal Emergency Management Agency (FEMA) announced its updated risk rating structure that will have property owners paying for coverage based on a more refined consideration of their structure’s risk of flooding and cost of repair.
Under this more modern approach, which FEMA calls Risk Rating 2.0: Equity in Action, the agency will use industry flood data, best practices, and catastrophic modeling to set rates. Effective Oct. 1 for new policyholders and April 2022 for existing policyholders, the new program also encourages flood mitigation by offering lower premiums in exchange for risk reduction actions, such as elevating utilities.
In a world with growing risks, this is a welcome—and timely—change. Without Risk Rating 2.0, every NFIP policyholder would get a rate increase this year. Under the new, more equitable plan, nearly 1.2 million of the more than 5 million NFIP policyholders will see an immediate decrease in premiums. More than 215,000 policyholders will get at least a $1,000 break on their yearly premium. Of the single-family homeowners who will see costs rise, nearly 88% will face a modest increase of $10 or less per month.
Since 1968, when it was first created, the NFIP has been an important part of minimizing flood impact and supporting recovery to thousands of flood-prone communities throughout the nation. But until this year, the NFIP’s rating approach had not been substantially changed in more than 40 years. Over the decades, the NFIP has adjusted rates annually, similar to how car insurance companies price their premiums.
Risk Rating 2.0 recognizes, for the first time, the complex array of factors that affect flood risk and addresses the bias inherent in the old system against many older, modestly priced homes. Aside from making policy prices fairer and more equitable, the new program has the potential to help people better understand their flood risk and what can be done about it.
The previous pricing system required all policyholders to obtain a certain base level of coverage; property owners who needed more coverage could buy it, often at substantially reduced rates compared to the base. That approach essentially created a bias against lower-value homes, the owners of which often ended up paying an overall rate higher than that enjoyed by owners of more expensive properties.
In addition, the old system relied on outdated national averages for computing the expected cost of damage. Those averages, which are used to calculate premiums, favored owners of high-value properties because, essentially, one policyholder would pay the same rate to fully insure a fine crystal vase as another would pay to fully cover a cheap glass imitation. The new system instead uses replacement-cost values that reflect regional and area differences, so the price of coverage is proportionate to the actual cost it would take to replace or repair the property. These changes make the system fairer overall and help keep policyholders in lower-priced neighborhoods from overpaying for flood insurance.
Also importantly, the new system moves away from basing price primarily on a handful of broadly drawn and often dated flood map zones. Instead, the system puts the power of data collection and modeling to work to analyze a more detailed set of factors affecting flood risk, including proximity to and size of a water source, flood frequency and type (such as heavy rainfall or coastal erosion), ground and building elevation, foundation types, and drainage issues. The more detailed analysis allows for prices that run along a sliding scale—for example, setting different, risk-based rates for a riverfront home and one on a hilltop nearby—rather than grouping those two homes at the same rate simply because they’re in the same mapped zone. Under Risk Rating 2.0, policyholders can now realize savings for practical mitigation activities, such as elevating mechanical and electrical equipment above flood levels or installing flood openings.
Flooding is the most costly natural disaster in the U.S.— costing more than $900 billion in damage and economic losses since 2000—and affects every state. The recent disasters in Louisiana, Mississippi, and the Northeast from Hurricane Ida, and before that in Tennessee, North Carolina, New York, and New Jersey, are only the latest evidence that the nation remains largely ill-prepared for increasingly severe storms and flood threats.
Risk Rating 2.0 will be an important tool for educating homeowners, community leaders, and policymakers about the dynamic and growing risk of flooding, from coastal storm surges and overflowing rivers to overburdened and undersized drainage systems. It offers a truer and more equitable assessment of flood risk that will put a laser focus on the neighborhoods and communities in each state that are most at risk while offering relief to those who have been unfairly overpaying for years.
Laura Lightbody directs The Pew Charitable Trusts’ flood-prepared communities project.