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Watch this video to learn more about how the Federal Emergency Management Agency (FEMA) is restructuring its national flood insurance program.  

FEMA flood insurance is changing. It’s Massachusetts Flood Insurance Program is transforming flood insurance pricing with a 21st century rating methodology that is actuarially sound, equitable and easy to understand. Using cutting-edge technology and industry best practices, premiums will now reflect a property’s unique flood risk, the backbone of Risk Rating 2.0 – Equity in Action.” 

Have you ever wondered why high-rise condominium or cooperative buildings would be required to carry flood insurance when such a small portion of the building typically sustains damage? In New Jersey for example, flood insurance for boards and owners of high-rise buildings is a topic of great concern following Hurricane Sandy in 2012, Hurricane Ida in 2021 and climate projections that predict a substantial increase in storms with the potential to cause significant flooding. 

fema flood insurance

The organization defines a flood as “a sudden and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties from an overflow of inland or tidal waters, unusual and rapid accumulation or runoff, or mudflow.” That might sound like a mouthful, but it’s a very important distinction. For example, a burst pipe or sprinkler system leak is not the type of scenario that is typically covered under a flood insurance policy. A parking garage, basement unit or an upper-level apartment impacted by a deluge of water due to significant rainfall is more likely to be defined as a flood event and subject to coverage. 

In general, flood insurance offered under the National Flood Insurance Program (NFIP) is not as straightforward as other types of policies. Without a capable property management company that offers access to a team of dedicated flood insurance experts, condo and co-op boards and building owners must carefully review their policies for exclusions, coverage amounts and terms on their own. 

What is Risk Rating 2.0?

In short, Risk Rating 2.0 is how flood insurance is being recalculated. 

According to the organization’s website:  

Risk Rating 2.0 is equity in action. FEMA, through the new pricing methodology, will better inform individuals and communities about flood risk, set premiums to strongly signal those risks and promote actions to mitigate against them. Individuals will no longer pay more than their fair share in flood insurance premiums. 

All NFIP policyholders have been subject to premium increases every year. However, under Risk Rating 2.0, rate increases will not continue indefinitely. Our organization recognizes that under the new pricing plan each policyholder will be affected differently based on their property’s individual flood risk. Some premiums will go up, some will go down, and some will stay about the same. Under Risk Rating 2.0, roughly two-thirds of policyholders with older pre-Flood Insurance Rate Map (FIRM) homes will see their premiums decrease. For policyholders whose premiums will be going up, their policies will be transitioned using the existing statutory limits on increases imposed by Congress. In general, that means that the annual increases will be capped at 18%, only increasing until the full risk rate has been reached. Additionally, we will allow existing policyholders to transfer their current discount with the sale of their property. 

To begin these changes, we are updating Congress and other key industry partners, state agencies, private sector and organizations to ensure a clear view and understanding of the implementation process of Risk Rating 2.0. Working with the Write Your Own companies, we will communicate with policyholders to understand what these changes will mean to them. 

The government entity recently announced changes to the way the NFIP calculates flood risk and insurance rates. The new methodology is known as Risk Rating 2.0 and will no longer use flood zones to calculate flood insurance rates. Instead, calculation will consider the building’s foundation and type of structural system (i.e., concrete, steel, timber), elevation, distance from a body of water, the area’s historic flood frequency and building replacement costs. 

Prior to these changes, FEMA had not updated NFIP’s rating methodology in 40 years. The goal of these changes is to more fairly determine flood insurance rates based on a robust mix of risk factors. While a majority of policyholders across the country will see a decrease in their annual premiums, most condominiums and high-rises near flood zones will be paying more. It is estimated that around 60% of all policyholders will see an increase. 

When will Risk Rating 2.0 go into effect? 

The organization is conscious of the far-reaching economic impacts the pandemic has had on the nation and existing policyholders and is taking a phased approach to rolling out the new rates. 

 In Phase I: New policies beginning Oct. 1, 2021 will be subject to the Risk Rating 2.0 rating methodology. Also beginning Oct. 1, existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums. 

In Phase II: All policies renewing on or after April 1, 2022 will be subject to the Risk Rating 2.0 rating methodology. 

How will the new rating methodology impact the affordability of a policy? 

FEMA flood insurance recognizes and shares concerns about flood insurance affordability. Currently, they do not have the statutory authority to consider affordability in setting rates but will ensure the transition to new rates under Risk Rating 2.0 complies with all statutory rate increases in place by Congress. To help address the issue, in April 2018 they delivered an Affordability Framework to Congress to help policymakers consider how to provide targeted assistance to existing and potential policyholders. The organization will continue to work with Congress to examine flood insurance affordability options. 

How will premium increases or decreases impact policyholders? 

Current policyholders who will face premium decreases under Risk Rating 2.0 will transition to the lower rate immediately at the first renewal of their policy. Any premium increases will transition gradually and within the existing statutory limits until the full risk rate for the property is reached. 

It's important to note that only buildings located in a FEMA-classified flood hazard zone, areas at higher risk of floodwater inundation, are mandated to hold an NFIP policy. However, some of these zones were not defined until 2007, five years before Hurricane Sandy wrought billions of dollars in damage to buildings, infrastructure and personal property on the East coast, for example. Since that time, a decreasing number of properties in the Northeast hold flood insurance policies despite immediate risks posed by strengthening storms in the area. 

How does Risk Rating 2.0 affect the grandfathered rating discount? 

Grandfathering has been available to policyholders when a map change results in either a rating zone or base flood elevation change. However, since Risk Rating 2.0 will be able to provide each building’s individual flood risk, all policies formerly eligible for grandfathering will transition to their new full-risk premium. Increases will be gradual and within the 18% annual cap imposed by Congress. Decreases will apply upon first renewal on or after October 1, 2021. Similar to other policies, some premiums will decrease, some will increase, and some will stay about the same. 

While maps have changed for many policyholders, fewer than 5% of single-family homes are actually grandfathered. As of March 2020, there are approximately 151,409 grandfathered properties nationwide. These policies represent a small percentage (4.4%) of the 3.5 million single-family, non-leveed properties insured under the NFIP. The average annual premium for these grandfathered properties is $1,077, which is lower than the average annual premium for subsidized NFIP policies (Pre-FIRM) at $1,875. 

The difference between these will gradually be adjusted under Risk Rating 2.0, as FEMA will know the full-risk rate for all properties. As a result, they will be able to charge more appropriate premiums that reflect each property’s individualized flood risk. 

FEMA Flood Insurance for HOAs & Condos

Boards and high-rise managers who have ever experienced hurricanes or storms, know first-hand the value of a flood insurance policy – the primary source of recovery for property damage caused by flooding. FirstService Residential frequently receives notices of flood claims from various communities, high-rises and portfolios throughout our service area. Those claims included buildings with an existing flood insurance policy, as well as many that did not have flood insurance. The latter group will likely have to finance building repairs out of pocket. 

Decision makers in HOAs, high-rises and condominiums located in low-risk flood zones typically choose not to purchase a flood insurance policy, because there is no requirement to do so for their area. Yet, according to FEMA, 25% of all flood insurance claims occur in areas that are considered low-risk hazard flood zones.  

Disclaimer: This statistic was provided by FEMA and only accounts for claims reported on current flood policies already in place. It is impossible to know how many potential claims there would be for properties in low-risk flood zones without coverage in place, but it’s safe to say that statistic would be much higher. 

Why is FEMA Changing Their Flood Insurance Premiums?

The organization has a statutory obligation to charge actuarially sound premiums and inform policyholders of their flood risk. Under Risk Rating 2.0, FEMA flood insurance rates will reflect each building’s individual flood risk using structure-specific data that are easier to understand. With access to the latest industry technology and NFIP mapping data, policyholders will be able to better understand how their flood risk is reflected in the cost of their insurance.  

Without action, existing inequities would continue — widening the gap between rate payments and claims payouts and making it harder to meet the needs of our customers. As flooding events become more frequent and severe, Risk Rating 2.0 will allow FEMA to transform the NFIP into a financially stable program that is accountable to taxpayers, more accurately reflects flood risk to both policyholders and non-policyholders and helps disaster survivors recover faster after floods.

The government entity is committed to building a culture of preparedness across the nation. Purchasing flood insurance is the first line of defense against flood damage and a step toward a quicker recovery following a flood. 

Since the 1970s, rates have been predominantly based on relatively static measurements, emphasizing a property’s elevation within a zone on a Flood Insurance Rate Map (FIRM). 

This approach does not incorporate as many flooding variables as Risk Rating 2.0. Risk Rating 2.0 is not just a minor improvement, but a transformational leap forward. Risk Rating 2.0 enables them to set rates that are fairer and ensures rate increases and decreases are both equitable. 

FEMA’s flood insurance is building on years of investment in flood hazard information by incorporating private sector data sets, catastrophe models and evolving actuarial science. 

With Risk Rating 2.0, they now have the capability and tools to address rating disparities by incorporating more flood risk variables. These include flood frequency, multiple flood types—river overflow, storm surge, coastal erosion and heavy rainfall—and distance to a water source along with property characteristics such as elevation and the cost to rebuild. 

Currently, 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. Because Risk Rating 2.0 considers rebuilding costs, the organization can equitably distribute premiums across all policyholders based on home value and a property’s unique flood risk. 

What's Not Changing Under Risk Rating 2.0?

fema flood insurance

FEMA flood insurance is upholded by policies and statutory requirements, including: 

  • Limiting Annual Premium Increases: Existing statutory limits on rate increases require that most rates not increase more than 18% per year. 

  • Using Flood Insurance Rate Maps (FIRMs) for Mandatory Purchase and Floodplain Management: FEMA’s flood map data informs the catastrophe models used in the development of rates under Risk Rating 2.0. That is why critical flood mapping data is necessary and essential for communities. It informs floodplain management building requirements and the mandatory purchase requirement. 

  • Maintaining Features: They strive to maintain features in order to simplify the transition to Risk Rating 2.0 by offering premium discounts to eligible policyholders. This means: 

  • FEMA flood insurance will continue to offer premium discounts for pre-FIRM subsidized and newly mapped properties: Policyholders will still be able to transfer their discount to a new owner by assigning their flood insurance policy when their property changes ownership. And, discounts to policyholders in communities who participate in the Community Rating System will continue. Communities will continue to earn National Flood Insurance Program rate discounts of 5% - 45% based on the Community Rating System classification. However, since Risk Rating 2.0 does not use flood zones to determine flood risk, the discount will be uniformly applied to all policies throughout the participating community, regardless of whether the structure is inside or outside of the Special Flood Hazard Area. 

Get In Touch

Connect with FirstService Residential. Our team has been managing HOAs, condominiums, high-rise buildings and more for years! Our experienced team can help you establish a plan of action when it comes to determining what type of flood insurance (or any property insurance) you should have to optimize your budget and ensure the safety of your residents! 

Wednesday December 15, 2021