The first wave of changes took effect October 1, 2021 with new policies now priced under the revised methodology. The second phase of changes will begin on April 1, 2022, when renewing policies (with effective dates on or after 4/1/2022) will shift to the new rating system. Let’s take a closer look at what that means for you and your clients.

 

What are the chances of Risk Rating 2.0 being delayed?

On December 3, 2021, President Biden signed legislation passed by Congress to reauthorize the National Flood Insurance Program (NFIP) through February 18, 2022. According to FEMA, reauthorization is an opportunity for Congress to “take bold steps to reduce the complexity of the program and strengthen the NFIP’s financial framework”. While it remains to be seen if Congress will take action before next February to alter the NFIP, the rollout of Risk Rating 2.0 is continuing on schedule.

 

How does Risk Rating 2.0 work?

Risk Rating 2.0, subtitled “Equity in Action”, is the overhaul of how FEMA calculates flood risk and determines premiums for homes insured by the NFIP. Prior to Risk Rating 2.0, a property’s elevation relative to the flood plain was the driving factor in assigning risk, and homes situated at the same elevation were subject to the same rating.
 
However, if those two homes situated in the same FEMA flood zone experienced a flood, although they pay the same premium, the cost to repair each home may differ. Risk Rating 2.0 is called “Equity in Action” because it introduces multiple new risk factors with the intent of fairer priced NFIP premiums for each individual home.
 
The new pricing methodology under Risk Rating 2.0 includes variables such as:

• Distance to a coast, ocean, and/or river

• Stream order

• Flood type (e.g. Fluvial/Pluvial)

• Ground elevation

• First floor height

• Construction type/Foundation height

 
The cost to rebuild and a broader range of flood frequencies are also part of the calculation. FEMA gathers this data from its own sources and has also adopted the use of third-party data providers.
 
One factor that will no longer be used in the rate calculation is the FEMA-assigned flood zone[MN1] . A property’s flood zone will still determine whether flood insurance is required, but it will no longer factor into premium pricing.

 

Risk Rating 2.0 is in effect for new policies

In September 2021, 38 bipartisan members of Congress sent a letter to House leadership asking for new legislation to delay the rollout of Risk Rating 2.0. Despite their efforts, the changes went into effect on October 1 for new NFIP policies.
 
Legislators, many from coastal states, sought to delay the changes, fearing that their constituents would experience double-digit increases to their flood insurance premiums. FEMA has projected that 66% of NFIP policyholders would see at most a $10 per month increase on their premiums under Risk Rating 2.0, and 23% of policies would actually see a decrease of $86 per month on average. About 4% of policies are estimated to rise by more than $20 per month, and it’s out of this group that you may be hearing stories of skyrocketing flood insurance costs.
 
Click here for a detailed state-by-state or ZIP code breakdown of projected NFIP rate increases under Risk Rating 2.0.

 

Risk Rating 2.0 goes into effect in April for renewing policies with effective dates on and after 4/1/2022

April 1, 2022 marks the point at which all NFIP policies will begin to be priced under the new Risk Rating 2.0 methodology, including renewals. All renewals with effective dates on and after April 1, 2022, are subject to the new rating methodology. Unlike new policies, which must pay the revised rate under Risk Rating 2.0 for the property, most renewing policies are capped at an 18% annual increase. Renewing policyholders will eventually pay the new rate, but they have the benefit of ramping up to that amount over time.  
 
Prior to April 1, 2022 renewing NFIP policies may be quoted under both the legacy rating system and Risk Rating 2.0. You can work with your client to select the less expensive of the two quotes. However, you and your client should be aware that any subsequent renewal (i.e. for 2023) will be under the Risk Rating 2.0 methodology.   

 

How does Risk Rating 2.0 impact private flood insurance?

The short answer is that Risk Rating 2.0 does not impact private flood insurance premiums. EZ Flood premiums were already calculated utilizing risk factors that the NFIP has now adopted. If you have clients in the estimated 4% of NFIP policyholders who are seeing a major premium increase, you may want to consider private flood insurance through Aon Edge. Our product offers higher limits and more customizable coverage than the NFIP, and is easy to quote.
 
Do you have questions about EZ Flood? Reach out to us – we would love the opportunity to serve you!

 
_{This article is provided for general informational purposes only and is not intended to provide individualized advice. The article is not a replacement for any NFIP publications. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy}