FEMA’s new flood insurance policy is fairer and rewards mitigation


For decades, federally backed flood insurance rates were calculated using an outdated system, based on an old understanding of flood risk. This means that some policyholders covered by the National Flood Insurance Program (NFIP) whose properties have a lower flood risk have paid too much while others with a higher flood risk have not. not paid enough.

Now it looks like the government is on the verge of correcting this imbalance: earlier this year, the Federal Emergency Management Agency (FEMA) announced its updated risk rating structure that will require homeowners to pay for the coverage based on a closer look at the structure of their structure. risk of flooding and cost of repairs.

Under this more modern approach, which FEMA calls Risk Rating 2.0: Equity in Action, the agency will use industry flood data, best practices and disaster modeling to set rates. Starting October 1 for new policyholders and April 2022 for existing policyholders, the new program also encourages flood mitigation by offering lower premiums in exchange for risk reduction actions, such as raising public services.

In a world of increasing risk, this is a welcome and timely change. Without the 2.0 risk rating, every NFIP policyholder would benefit from a rate increase this year. Under the new, fairer plan, nearly 1.2 million of the more than 5 million NFIP policyholders will see an immediate reduction in premiums. More than 215,000 policyholders will benefit from a reduction of at least $1,000 on their annual premium. Among single-family homeowners who will see their costs rise, nearly 88% will face a modest increase of $10 or less per month.

A revision was late

Since 1968, when it was established, the NFIP has played an important role in reducing the impact of floods and supporting the recovery of thousands of flood-prone communities across the country. But until this year, the NFIP’s scoring approach had not changed significantly in over 40 years. Over the decades, the NFIP has adjusted rates each year, similar to how car insurance companies set their premiums.

The Risk Rating 2.0 recognizes, for the first time, the complex array of factors that affect flood risk and corrects for the bias inherent in the old system against many older, modestly priced homes. In addition to making policy prices fairer and more equitable, the new program has the potential to help people better understand their flood risk and what can be done about it.

Understanding the Benefits of Risk Rating 2.0

A fairer system

The old rating system required all policyholders to obtain a certain basic level of coverage; owners who needed more coverage could purchase it, often at significantly reduced rates from the base. This approach essentially created a bias against lower-value homes, whose owners often ended up paying a higher overall rate than those enjoyed by owners of more expensive properties.

In addition, the old system relied on outdated national averages to calculate the expected cost of damage. These averages, which are used to calculate premiums, favored owners of high-value properties because, essentially, one insured would pay the same rate to fully insure a fine crystal vase as another would pay to fully cover an imitation of good glass. Marlet. The new system instead uses replacement cost values ​​that reflect regional and regional differences, so the price of coverage is commensurate with the actual cost it would take to replace or repair the property. These changes make the system fairer overall and help prevent policyholders in low-cost neighborhoods from paying too much for flood insurance.

A better understanding of flood risk, data

Also importantly, the new system deviates from the price base primarily on a handful of widely drawn and often dated flood map areas. Instead, the system uses the power of data collection and modeling to analyze a more detailed set of factors affecting flood risk, including proximity and size to a water source, frequency and type of flooding (such as heavy rain or coastal erosion), ground and building elevation, foundation types, and drainage issues. The more detailed analysis allows for prices that follow a sliding scale – for example, setting different rates based on risk for a house by the river and one on a nearby hill – rather than lumping these two houses together at the same rate simply because they are in the same mapped area. With Risk Rating 2.0, policyholders can now realize savings for practical mitigation activities, such as raising mechanical and electrical equipment above flood levels or installing flood openings .

Flooding is the costliest natural disaster in the United States – costing more than $900 billion in damage and economic loss since 2000 – and affects every state. The recent disasters in Louisiana, Mississippi and the northeast from Hurricane Ida, and before that in Tennessee, North Carolina, New York and New Jersey, are just the latest evidence that the nation remains largely ill-prepared for increasingly violent storms and floods. threats.

The Risk Rating 2.0 will be an important tool for educating homeowners, community leaders and decision makers on the dynamic and growing risk of flooding, from coastal storm surges and overflowing rivers to overloaded and undersized drainage systems. It offers a truer and fairer assessment of flood risk that will focus on the neighborhoods and communities in each state most at risk while providing relief to those who have been unjustly overpaying for years.

Laura Lightbody leads The Pew Charitable Trusts Flood Prepared Communities Project.


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