The National Flood Insurance Program (NFIP) is redesigning its risk rating by leveraging industry best practices and current technology, FEMA will deliver rates that are fair, make sense, are easier to understand and better reflect a property’s unique flood risk. FEMA calls this effort Risk Rating 2.0.
Risk Rating 2.0 implementation has been deferred To October 1, 2021.
While the agency initially announced that new rates for all single-family homes would go into effect nationwide on October 1, 2020, some additional time is required to broaden the agency’s analyses of the proposed rating structure across its entire book of business, to include its relationship to communities behind levees. Therefore, FEMA decided to adjust implementation of Risk Rating 2.0 by one year to October 1, 2021.
Additionally, this extension also allows for all National Flood Insurance Program (NFIP) policies – including, single-family homes, multi-unit and commercial properties – to change over to the new rating system at one time instead of a phased approach, as originally proposed.
Over the course of the next year, FEMA will continue to actively engage with Congress and other key stakeholders to ensure transparency and visibility as we work to transform the NFIP.
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Why FEMA is Undertaking Risk Rating 2.0
FEMA is focused on building a culture of preparedness by closing the insurance gap. FEMA is transforming the NFIP into one that people value and trust and that best serves the nation. This requires FEMA to change the way it has historically viewed flood risk and priced flood insurance.
Risk Rating 2.0 aims to accomplish this by leveraging industry best practices and current technology, FEMA will deliver rates that are fair, make sense, are easier to understand and better reflect a property’s unique flood risk.
Through these efforts, FEMA’s goal is to make flood insurance significantly easier for agents to price and sell policies, and in turn, help customers better understand their flood risk and the importance of flood insurance.
Demand for change has been building for a long time, and Risk Rating 2.0 will be the culmination of a multi-year effort.
Changes Under Risk Rating 2.0
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 NFIP-insured properties will go into effect nationwide on October 1, 2021.
Risk Rating 2.0 will comply with existing statutory caps on premium increases. Risk Rating 2.0 will prevent significant premium increases by offering a glidepath discount to existing policyholders and new homeowners buying homes from existing policyholders.
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.
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
Answers To Common Questions About Risk Rating 2.0
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.
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; and
- Elevating machinery and equipment above the lowest floor.
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.
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.