On April 1, 2021, FEMA released its highly anticipated flood insurance rating methodology, Risk Rating 2.0-Equity in Action.
FEMA first announced “Risk Rating 2.0-Equity in Action” in March 2019 as an effort to improve flood maps and offer rates that are fair, easy to understand, and more aligned with a property’s unique flood risks. The new rating system was initially set to be implemented on October 1, 2020. FEMA extended the date by a year to broaden its analysis of the proposed rating system.
The NFIP currently uses a rating structure originally developed in the 1970s that looks at flood zones across the country and calculates expected losses of groups of structures with similar flood risk and similar key structural aspects. The same rate is assigned to all policies in a group. Despite the evolution of technology and FEMA’s expanded understanding of flood risks, updates to the rating methodology have not occurred in over 50 years. As a result, the NFIP has been underfunded, resulting in a total loss of over $36 billion in flooding-related events.
Risk Rating 2.0 was designed to take advantage of technological advances, improve risk assessment, and improve the financial stability of the NFIP. Under the new methodology, flood zones will no longer be used to calculate insurance premiums. Rather flood insurance rates will be based on the actual flood risk and value of individual properties. FEMA expects that this individualized approach will result in a more equitable distribution of costs considering the risks.
The new rating system will not impact federal mandatory purchasing requirements or lender discretionary purchasing requirements. Lenders will continue to use current Flood Insurance Rate Maps (FIRMs) to determine whether a property is located in a Special Flood Hazard Area (SFHA) and thus subject to the federal mandate. Lenders will also retain the right to require borrowers to obtain flood insurance even in the absence of the federal mandate.
FEMA has planned to roll out Risk Rating 2.0 in two phases:
- Phase I – On October 1, 2021, new policies will be subject to the Risk Rating 2.0 methodology and existing policyholders eligible for renewal will be able to take advantage of premium decreases.
- Phase II – NFIP policies that renew on or after April 1, 2022 will be subject to the new rating methodology.
Although many policyholders may see favorable changes to their premiums, affordability for others is a primary concern. Long-term effects of premium increases could not only impact current policyholders’ ability to pay the premiums, but also their ability to sell the property in the future. While FEMA acknowledges concerns about the affordability, “FEMA does not have the statutory authority to consider affordability in setting rates.”
For those policies that will see significant rate increases, the increase will be capped at the statutory limit of 18% a year until the property reaches its “full-risk rate.” When policyholders are notified that their NFIP insurance premium is increasing, policyholders on mortgaged property may contact their mortgage servicer with questions about the premium increase and the effect on their monthly mortgage payment given the mandatory escrow requirement for most flood insurance policy premiums. Mortgage servicers should work now to develop their policies and procedures for addressing borrower questions about Risk Rating 2.0.