How does Risk Rating 2.0 – a new way to bill customers who take out flood insurance – impact homeowners and buyers?
WASHINGTON – Risk Rating 2.0 went into effect fully on April 1, 2022, changing the way the National Flood Insurance Program (NFIP) calculates flood insurance premiums.
What is Risk Rating 2.0?
Risk Rating 2.0 is a new pricing method and the biggest change to the way the National Flood Insurance Program (NFIP) calculates flood insurance premiums since the program began in 1968.
Premiums calculated under Risk Rating 2.0 reflect an individual property’s specific flood risk – a change from the old way, which put homes into a general risk category based on location and property type.
Why did the NFIP introduce Risk Rating 2.0?
The NFIP says it’s so property owners pay based on actual flood risk – to produce rates that are more equitable. It also helps policyholder understand their “true flood risk.”
How were flood insurance premiums calculated before?
The NFIP’s rating structure used only several basic characteristics to classify properties and assign rates – location within a flood zone on a Flood Insurance Rate Map (FIRM), occupancy type, and elevation relative to the Base Flood Elevation (BFE). The old rating system didn’t consider individual flood risk or the cost to rebuild, plus it only considered two sources of flood risk: river flooding and coastal flooding.
How are premiums calculated under Risk Rating 2.0?
Premiums consider specific features of an individual property, including distance from water, type of flooding, flood frequency, structure foundation type, height of the lowest floor relative to BFE, prior claims and the structure’s replacement cost value. FEMA has provided a Rate Explanation Guide and a Discount Explanation Guide to show how rating variables affect premiums. Risk Rating 2.0 also adds pluvial flood risk – flooding from heavy rainfall.
Will subsidized premiums increase under Risk Rating 2.0?
No. Risk Rating 2.0 continues the phase-out of NFIP subsidies, which began with the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and continued with the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).
Properties currently grandfathered will see their premiums move towards a full risk-based rate. New policies and those renewed under Risk Rating 2.0 will not be grandfathered but will be limited by statutory rate increases. All new policies pay the full risk-based rate, and existing policies move to Risk Rating 2.0 pricing on renewal.
How much can premiums increase annually?
Under the law, premiums may increase no more than 18% annually for primary residences. Other property categories are required to have their premium increased by 25% per year until they reach full risk-based rates, including:
- non-primary residences
- non-residential properties
- business properties
- properties with severe repetitive loss
- properties with substantial cumulative damage
- properties with substantial damage or substantial improvement after July 6, 2012
Are there discounts for flood mitigation efforts?
Policyholders can receive mitigation credits for elevating a property, elevating machinery and equipment above the lowest floor, and installing flood openings below Base Flood Elevation (BFE).
All policyholders in communities that participate in the Community Rating System (CRS) receive discounts of 5%-45%, based on the community’s CRS score. Under the CRS, entire communities to undergo flood mitigation efforts so homeowners living in that community can receive a flood insurance discount.
Does being mapped into a different flood zone affect premiums?
No. Flood zones are no longer used in calculating a property’s premium under Risk Rating 2.0. Instead, premiums are calculated based on the specific features of an individual property. However, FIRMs are still used for the mandatory purchase requirements (usually mortgage lenders who require flood insurance coverage) and floodplain management.
Can new premiums under Risk Rating 2.0 be appealed?
No. An appeal procedure hasn’t been established. Policyholders can appeal NFIP flood maps, but if successful, it won’t change their insurance premiums.
How are premiums changing in my state under Risk Rating 2.0?
FEMA has posted state profiles showing changes under Risk Rating 2.0, and data at the county and zip code level can be downloaded. FEMA has also provided information on the cost of flood insurance for single family homes under Risk Rating 2.0, showing the number and percentage of policies by price range at the state, zip code, and county level, including the average replacement cost value in each price range and the percentage of policyholders facing different types of flood peril.
Are premiums affected by climate change?
Single-year premiums will not increase due to future climate change. However, if flood risk increases over time – due to climate change or any reason – premiums will increase to reflect increased risk.
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