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November 17, 2021

FEMA Implements National Flood Insurance Program’s Risk Rating 2.0 Initiative For Determining NFIP Premium Rates; First Major Change Since 1970s

By Timothy H. Penn, Travelers Companies, Inc.

On October 1, 2021, barring any last minute intervention by Congress or some other political obstacle, the Federal Emergency Management Agency (FEMA) will implement the National Flood Insurance Program’s long-awaited Risk Rating 2.0 initiative for determining NFIP flood insurance premium rates.  Heralded as the first major NFIP pricing methodology change since the 1970s, FEMA is promoting the initiative as “Equity in Action” that will make flood insurance rates more equitable while helping property owners better understand the flood risk of their individual properties.  There is also hope that Risk Rating 2.0 will improve the NFIP’s financial position and sustainability, and eventually end the cycle of the NFIP bailouts by taxpayers to pay for losses following major catastrophe events involving flooding.  But despite the hype, questions remain as to whether the lofty goals for Risk Rating 2.0 can be achieved, and whether the flood insurance premium pricing changes the initiative requires will lead to unintended consequences for policyholders and their political representatives.

What is Risk Rating 2.0?

Risk Rating 2.0 is a new methodology for determining NFIP flood insurance premium rates based on a revised set of “rating variables,” or property characteristics used to evaluate a property’s risk of damage from flooding.  Historically, rate setting depended mostly on the elevation of the property and where it is situated relative to “flood zones,” areas where FEMA has determined the level of flood risk.  Flood zones are designated using the letters A, B, C, D, V and X.  A flood zone beginning with the letter A (such as A, AE, AH, AO, AR, or A followed by number) are considered high risk areas.  Flood zones beginning with the letter V (such as V, VE or V followed by a number) are considered high risk coastal areas.  Zones B, C and X are areas of moderate to minimal risk.  Zone D is for areas with possible but undetermined flood risk.  FEMA publishes flood insurance rate maps (FIRMs) showing such information to support the NFIP and help participating communities with floodplain management and compliance with NFIP requirements.

Risk Rating 2.0 will use an expanded list of rating variables to establish NFIP premium rates, using data from government and third-party commercial sources in addition to FEMA’s own data.  The expanded rating variables include: the property location’s distance from a coast, ocean or river; whether the flood type for the location is coastal (from storm surge), fluvial (from overflowing rivers, lakes or streams), or pluvial (flash floods and surface water from extreme amounts of rainfall); ground elevation; height of a structure’s first floor; construction and foundation types; and the cost to rebuild the structure.  FEMA claims that advanced technology and industry best practices make it possible to use the new rating variables to establish NFIP premium rates by assessing a property’s flood risk more accurately.  This should eventually eliminate rate disparities where owners of lower-valued homes pay higher rates relative to their property’s risk while owners of higher-valued homes pay less.  For this reason, FEMA is promoting Risk Rating 2.0 with the tagline, “Equity in Action.”  FEMA also asserts that the initiative will improve the NFIP’s financial strength and sustainability, and help individuals and communities better understand flood risk.

Effect on NFIP Flood Insurance Rates

When implemented, FEMA estimates that 23% of NFIP policyholders will see average rate decreases of $86 per month.  However, 66% will likely see average rate increases between $0 and $10 per month.  An additional 7% are estimated to see average increases of $10 to $20 per month, while 4% will see average increases of greater than $20 per month.

FEMA’s ability to increase NFIP premium rates is constrained by the Homeowner Flood Insurance Affordability Act, passed by Congress in 2014, which limits annual rate increases to 18%.  For some policyholders, it may take several years of 18% rate increases before the full risk rate under Risk Rating 2.0 is attained.

Implementation Strategy

Risk Rating 2.0 will be implemented in two phases.  In the first phase, effective October 1, 2021, all new NFIP flood insurance policies are subject to the new rating methodology.  Existing policyholders will be offered an opportunity to convert to the new methodology after October 1, 2021, if it would result in a lower rate.  The new rating methodology will apply to all existing policies starting on April 1, 2022.  Other “pathways” to application of the new methodology will be available to policyholders that renewed their policy using the old “legacy” methodology, and for those who received a “legacy” methodology renewal offer but want to renew with the new Risk Rating 2.0 methodology.

Muted Opposition to Risk Rating 2.0

FEMA originally planned to implement Risk Rating 2.0 on October 1, 2020, which was roughly one month prior to the national presidential election.  On November 7, 2019, the agency announced through a press release that implementation of the initiative would be delayed to October 1, 2021. When it became clear in April of 2021 that FEMA planned to proceed with the October 1st implementation date, some members of Congress introduced bills intended to put the brakes on Risk Rating 2.0.

In the House of Representatives, Rep. Kathleen Rice (D – NY) introduced the NFIP RISC Act of 2021 (H.R. 2995) on May 4th.  The acronym “RISC” means “reporting on impact to seaboards and counties.”  The bill would require FEMA to provide a report to Congress of potential impacts of changes in the NFIP risk rating methodology before implementation.  Rep. Rice represents New York’s 4th congressional district, which is located on Long Island.  The bill has only two cosponsors.  One is Rep. Andrew Garbarino (R – NY), who represents New York’s 2nd congressional district, also located on Long Island.  The other cosponsor is Rep. Al Green (D – TX), who represents the 9th congressional district of Texas located in the south and southwest areas of the Houston metropolitan area.  The bill was referred to the House Financial Services Committee, where it remains as of September 15, 2021.

In the Senate, Senator John Neely Kennedy (R – LA), introduced the Flood Insurance Fairness Act (S. 1960) on June 7, 2021.  The bill would require the FEMA Administrator to obtain prior Congressional authorization to implement any adjustment in NFIP flood insurance premium rates.  The bill has no cosponsors.  It was referred to the Senate Committee on Banking, Housing and Urban Affairs, where it remains as of September 15, 2021.

Will Risk Rating 2.0 Survive Implementation

The last time a major change to the NFIP flood insurance rate structure was implemented, there was severe political backlash.  The Biggert-Waters Flood Insurance Reform Act of 2012, signed into law by President Barrack Obama on July 6 of that year, made numerous changes to the NFIP.  Some of the changes authorized FEMA to make rate changes that phased out rate subsidies for second homes, business properties and so-called severe repetitive loss properties.  It also authorized rate increases of 25% annually for such properties until their premiums reached the full actuarial cost of the coverage.  Once such increases were implemented, the outrage from affected policyholders led Congress to backpedal on the rate increases by passing the Homeowner Flood Insurance Affordability Act of 2014. As noted earlier, the Affordability Act limits annual rate increases to 18% annually.

Will there be a similar backlash to Risk Rating 2.0 once it is implemented?  We will monitor all developments and report in future editions of the newsletter.

    Timothy H. Penn

    Second Vice President-Property Claim, for Travelers Companies, Inc., in Hartford, Connecticut

    Tim is a former Chair of both the Property Insurance Law Committee and the Dispute Resolution Committee and is Outgoing Chair for Insurance Regulation. He can be reached at [email protected]

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