Published Date 6/3/2022
The world’s climates are changing. Along with it, flood risk methodology must change as well. Redfin’s Julia Weaver explains how, for the past 50 years, the Federal Emergency Management Agency (FEMA) has used the same flood risk equations for calculating insurance premiums. “The previous methodology, introduced as part of the National Flood Insurance Act of 1968, calculated homeowner’s risk by analyzing what flood zone their home is in using FEMA’s Flood Insurance Rate Map. But climate change demanded a revision,” she reports.
FEMA’s half-century-old approach no longer reflects a property’s unique flood risk, with a staggering 70% of American homeowners now at risk of flooding. So FEMA recently introduced Risk Rating 2.0, a new pricing methodology for insurance premiums that no longer relies on flood zones. Rather, the National Flood Insurance Program (NFIP) will assess the risk of each individual property. “The premium increases started going into effect for existing policyholders on April 1, 2022,” says Weaver. “New policyholders and those experiencing premium decreases started seeing changes take effect in October 2021. You’ll likely see more reasonable insurance rates that reflect a property’s flood risk, and more accurate flood maps.”
How this works: Risk Rating 2.0 aims to reflect the unique risk of each property accurately. Before Risk Rating 2.0, insurance rates would differ dramatically from one zone to another – even if the properties were located across the street from one another. “It’s important to know that FEMA’s flood zones will determine whether a property with a mortgage needs flood insurance,” says Weaver. “Under the previous methodology, many mortgage lenders were legally mandated to require homeowners to purchase flood insurance.” She goes on to say that with Risk Rating 2.0, the insurance premiums for each property will be based on risk variables such as the source of the water, its distance from the coast or other flood sources, flood frequency, flood types, and property characteristics.
This is all designed to offer FEMA a more accurate picture of risk at the individual property level, create rates that are easier for policyholders and insurance agents to understand, reflect more types of flood risk than was previously described, and employ the use of up-to-date actuarial practices to set rates. Before, homeowners could find themselves underinsured, while others are paid higher rates for unnecessary coverage. “The goal of Risk Rating 2.0 is to ensure that premiums are based on the home’s flood risk,” says Weaver. “FEMA flood zone will still determine whether a property is required to have flood insurance, but the premium rates will be based on the individual characteristics of the property, such as proximity to water, rebuild cost, and flood type.”
By the same token, homes that are not near a flood source and have lower repair costs will likely see a decrease in rates. FEMA estimates that about 66% of insurance policies will see a $0-$10 premium increase per month, and about 23% will see a decrease of $86 per month, on average. About 7% of customers could see an increase of $10-$20 per month, and the remaining 4% may see premiums increase by $20 or more. FEMA insures more than 5 million policyholders.
Redfin, TBWS
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