Photo by jim gade on Unsplash
As reported in today's issue of The New York Times, the way the National Flood Insurance Program sets premiums for coverage is going to change for the first time in 50 years next Friday. For some current and prospective property owners, the change may be painful.
The methodology change takes effect for new policies on Oct. 1, 2021, with renewals following on April 1, 2022.
The traditional way of pricing flood insurance has been to use a flood insurance rate map (FIRM) to determine the flood risk zone in which a property sits. For those properties in special flood hazard areas (SFHA), premiums depended on the property's elevation above ground level. Federal regulations require lenders that issue federally-backed mortgages to verify that properties within SFHAs carry flood insurance. The coverage is optional in other zones.
The new pricing methodology, dubbed "Risk Rating 2.0 - Equity in Action," endeavors to measure flood risk by using more variables besides location and elevation. These include:
- Flood frequency
- The types of flooding to which the area may be prone (river overflow, storm surge, coastal erosion, heavy rainfall)
- Distance to a water source (ocean, river, lake, etc.)
- Cost to rebuild
Theoretically, a relatively small house a mile from a water source will have a smaller flood risk than a large house on the shore. Consequently, the new methodology will result in a higher flood insurance premium for the second house, even if they are in the same zone on the flood map.
The Federal Emergency Management Agency (FEMA), which administers the program, says that the new methodology will "equitably distribute premiums across all policyholders based on home value and a property’s unique flood risk." The agency maintains that, under the current system, "policyholders with lower-valued homes are paying more than their share of the risk while policyholders with higher-valued homes are paying less than their share of the risk." FEMA estimates that two-thirds of policyholders will have average monthly premium increases of $0 to $10, almost a quarter will see their premiums decrease, and 4% will see increases of more than $20.
Everyone who has purchased or will purchase flood insurance will feel the effects of this change. Your clients with properties next to a water source are likely to see their premiums rise for several years. By law, flood insurance premiums may rise no more than 18% per year. The highest risk properties may see several years of increases at that level.
With the effective date of the change approaching, this is the time to inform your flood insurance clients. Even if their policies will not renew until next spring, these changes may effect the ability to sell a property immediately.
Visit the Flood page in the Answer Center of this website and click the "Helpful Tools" tab to find more information about Risk Rating 2.0, including an estimate of the effect in New York. FEMA also offers information and resources on its flood insurance website. More information about flood insurance is available on the Big "I" Virtual University Flood Resources page.