Should I renew flood insurance under Risk Rating 2.0 or the legacy system?
Flood insurance is changing, and it can be hard to keep track of it all. While all new NFIP policies are priced under the Risk Rating 2.0 methodology as of October 1, 2021, renewing policies are not as straightforward. On April 1, 2022 all renewing NFIP policies with an effective date on or after April 1, 2022, will be rated under the new system. Until then, there is some flexibility for how to approach renewals. Let’s explore how to talk to your clients about their options.
The elephant in the room: Will flood insurance premiums increase?
This may be the biggest question on your clients’ minds. Although FEMA estimates that 23% of NFIP policyholders will see their monthly premiums decrease, and 66% will see an average increase of no more than $10 per month, news stories have highlighted anecdotes of much steeper rates. The only way to know for sure is to quote your client’s property as a new policy under Risk Rating 2.0 and see how the numbers fall.
How do I talk to my clients about renewing their flood insurance policy?
According to FEMA, “existing policyholders with policy effective dates between October 1, 2021 and March 31, 2022 will be able to renew into the new pricing methodology.” The key phrase here is that they “will be able to renew”, not that they must renew into the new pricing system. In fact, FEMA states that it “supports the policyholder’s ability to renew into the more favorable option of either the legacy pricing methodology or the new pricing methodology,” and that “insurers should engage policyholders in an effort to renew them into the more favorable option.”
There are four possible scenarios for how you and your client can tackle their NFIP renewal. The path you take depends on your client’s interest in Risk Rating 2.0. According to FEMA:
For Pathways 1, 2, and 3, if the policyholder has not expressed an interest in the new pricing methodology, then the insurer must initiate the renewal process using the legacy pricing methodology. For Pathway 4, if the policyholder has been offered a new pricing methodology renewal quote and prefers the new pricing methodology, then the insurer must initiate the renewal process using the new pricing methodology.
Let’s look at each pathway:
Pathway #1: Maintain legacy pricing
In this situation, your client receives a renewal quote under the legacy pricing system. They agree to those terms and pay the premium, and you renew their NFIP policy. However, this is the last time they can utilize the legacy pricing. If they renew their NFIP policy (on or after October 1, 2022) they will then be subject to the new Risk Rating 2.0 methodology.
What if it turns out later that pricing under Risk Rating 2.0 was actually more favorable than the legacy system? No worries, because in that case FEMA states that “the insurer will reform that policy term and refund the difference.”
Pathway #2: Renew with legacy pricing, and later rewrite into Risk Rating 2.0 pricing
In this case, your client receives a renewal notice under the legacy pricing system, they agree to those terms and pay the premium, and their NFIP policy renews. Sometime after the renewal, you and your client talk and decide to price their policy under the Risk Rating 2.0 methodology. If your client prefers this new quote, you can then cancel and rewrite the NFIP policy to the beginning of the policy term, and any difference in premium will be refunded.
Pathway #3: Receive a legacy-priced quote, but renew into Risk Rating 2.0 pricing
This version is fairly simple. Your client receives a quote to renew their NFIP policy, priced under the legacy system, but the two of you talk and they request a quote under Risk Rating 2.0. It turns out that they prefer the Risk Rating 2.0-priced quote and renew their policy with that premium.
Pathway #4: Receive a Risk Rating 2.0-priced quote and renew under those terms
Finally, if you talk to your client about Risk Rating 2.0 and provide them with a quote that they find acceptable, then you can proceed to renewing a policy under the new methodology.
The bottom line is that you can talk to your clients before its time to renew their flood insurance policy and help them to choose an option that offers the best price.
An Alternative Pathway: Private flood insurance
The pathways described above may make your head spin, but don’t forget about EZ Flood private flood insurance available through Aon Edge. Risk Rating 2.0 doesn’t impact EZ Flood premiums, and our product offers more comprehensive, more flexible coverage than the NFIP. Reach out to us for a quote and keep all of your clients’ options on the table.
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