The flood insurance market is changing rapidly. While the National Flood Insurance Program (NFIP) has dominated the flood insurance space for the last 50 years, private flood insurance has started to take some of the burden off the federal program. There is a difference in how each determines rates. NFIP rating tables are relatively static, while private flood insurance companies rely on data and analytics to help determine risk and policy pricing. Read more to understand the differences and what factors help determine private flood insurance rates. 

NFIP rating tables are published in the official NFIP manual, which has been available to the public for decades, with rating factors for different risk attributes. 

Meanwhile, as the rest of the insurance industry has progressed into algorithmically derived rates and computer modeling, so has private flood insurance. This approach allows the markets bearing the risk to collect a premium that more closely represents the flood risk. Let’s look at the approach some private flood insurance companies take to determine the rate for flood risks. 
 

Elevation and Distance-to-Water

Elevation and distance-to-water are probably the two strongest premium factors in flood insurance. The level of elevation with respect to likely flood levels has been used for decades in the NFIP and has been determined with the use of Elevation Certificates and FEMA flood zones. 

Private flood insurance providers are using data gathered from satellite imagery to develop educated estimates of elevation for individual buildings, at a “rooftop level.” This improves the customer and agent experience and the accuracy of rating buildings without elevation certificates. Aon Edge uses Impact Forecasting, a data and analytics firm, to generate flood modeling that can run flood scenarios over a specific area to determine the likelihood and projected severity of flooding on a single building. 
 

Replacement Cost and Coverage Amounts

Replacement cost estimates and coverage amounts are also very important in determining eligibility and rates in the private flood insurance space. Customers will generally pay less per thousand dollars of coverage as they get closer to the replacement cost of the risk. This drives customers to select higher coverage amounts and insure more of their property. Insuring more of a structure also helps meet the 80% requirement some carriers have to pay replacement cost loss settlement on primary structures. If your property is not covered to value, it may be a better value to do so.
 

Primary Dwelling and Claims History 

Rates vary based on whether a single-family home is a primary or secondary property. Primary dwellings can often get more attention and a faster response from owners because of proximity and necessity. This can mean losses are addressed and mitigated faster, limiting payouts. Claims history can also be a rating or eligibility factor. Some carriers will not accept properties with previous flood claims, and others will not accept a property with claims over a recent period, such as five years. 

While private flood insurance is leading the charge with respect to innovation and advanced rating of flood insurance, the NFIP is making advancements as well. The NFIP will be undertaking a new rating approach with Risk Rating 2.0, bringing the federal program forward in both risk assessment and rating technology.

This article is provided for general informational purposes only and is not intended to provide individualized advice.