Rethinking the National Flood Insurance Program: Risk Rating 2.0

On March 12, 2019, the Federal Emergency Management Agency (FEMA) announced a change to its National Flood Insurance Program (NFIP) that affects the calculation of flood insurance premiums for homeowners. The new method, called Risk Rating 2.0, aims to strengthen NFIP fiscal stability by increasing revenue through premiums that more accurately reflect property flood risk. To make the NFIP more actuarially sound, Risk Rating 2.0 may mean higher premiums for higher risk, and lower premiums for lower risk. New premium rates will go into effect for single-family homes on October 1, 2020.

What are the challenges facing NFIP?

NFIP premiums are primarily based on two factors: the building’s location on a Flood Insurance Rate Map (FIRM) and its Base Flood Elevation. Together, the NFIP uses these metrics to measure the risk of flooding in a community, which is then used to determine the premiums and requirements for each flood zone on the FIRM. This approach has been criticized for “systematically mispric[ing] risks, effectively subsidizing residential building in flood-prone areas—with benefits disproportionately accruing to upper-income beach-house owners—and subjecting taxpayers to avoidable expenses.”

Since Hurricane Katrina, claims made through the NFIP have outpaced the revenue collected through premiums, which undermined the program’s financial stability. This deficit is largely attributed to catastrophic storms over the past decade.

The NFIP experienced a $1.4 billion shortfall in 2016; $300 million of this shortfall  is from subsidizing policies. In 2017, the NFIP collected $3.57 billion in total premiums while flood loss payments totaled $8.7 billion. By the end of 2018, the NFIP’s total deficit grew to $20.5 billion.

What is Risk Rating 2.0?

According to FEMA, Risk Rating 2.0 is intended to improve the policyholder’s experience by making the rate calculation process more transparent and easier to understand, while also pulling the program out of bankruptcy. Risk Rating 2.0 revises the 50-year process for determining insurance premiums by considering “rating characteristics,” such as:

• Different types of flood risk (flash flooding, coastal or river flooding, storm surge, etc.),
• Proximity of each building to the coast or water source, and
• The cost to rebuild homes to deliver equitable rates.

Currently, there are two primary issues with the NFIP: (1) flood insurance premium rates do not accurately account for a property’s actual risk of flooding and (2) subsidized premiums do not cover the costs of their claims. Risk Rating 2.0 will replace the standard of relying on a building’s placement in a FIRM that underestimates flood risk, thus producing low premiums and insufficient revenue.

Risk Rating 2.0 is intended to accurately reflect the cost to rebuild when calculating premiums, delivering fairer rates for owners of lower-value homes. Risk Rating 2.0 will calculate the real flood threat for each building using industry best technology and updated NFIP mapping data .

What does this mean for homeowners?

The short-term impacts may be painful for some homeowners—causing some to drop their flood insurance and leaving them vulnerable to flood events. Over time, homeowners that cannot afford flood insurance in high risk areas won’t purchase homes in those areas, as the increased cost of insurance is priced into the housing market. FEMA intends to balance premium increases with other factors, like home-value, to minimize adverse economic effects amongst those concerned with the affordability of new flood insurance premiums.

What does this mean for state, local and Emergency Management organizations?

Some climate experts and advocates believe the approach outlined in Risk Rating 2.0 is a step in the right direction to push state and local communities to plan and prepare for extreme weather. Many praise the change, believing that more accurate flood maps would inform communities of their actual risk and promote a culture of preparedness. It could also close the loophole that incentivizes building in flood zones with insurance rates that do not accurately reflect threats.

What does this mean for elected officials?

The main concern with NFIP Risk Rating 2.0 is affordability. While changes aim to pull the NFIP out of debt, the program should maintain existing statutory caps on premium hikes and continued subsidies for low-moderate income households. These practices may help protect the assets of lower income families and marginalized populations. At the same time, policymakers can help create space for marginalized populations outside of high-risk areas to ensure that affordable housing is available to those that will struggle to pay higher premiums.

To learn more about NFIP Risk Rating 2.0, follow FEMA’s NFIP transformation updates.

Bianca Castro is an Associate within Hagerty’s Recovery Division supporting New York City’s policy and closeout teams. Prior to joining Hagerty, Bianca was a Public Policy and International Affairs Fellow at Carnegie Mellon University and graduated with a Bachelor of Arts in Public Affairs from Syracuse University. Based in Brooklyn, Bianca continues to explore technology’s role in emergency management and public policy when she isn’t cycling or searching for NYC’s best pizza.