October 7, 2021

FEMA Rolls Out Risk Rating 2.0: New System for Calculating Flood Insurance Premiums

The Federal Emergency Management Agency (FEMA) recently unveiled a new program for calculating National Flood Insurance Program (NFIP) flood insurance premiums paid by policyholders. The new system, titled Risk Rating 2.0, builds on years of investment in flood hazard information and applied mathematics. The approach uses enhanced capabilities, tools, and data to better reflect a property’s calculated flood risk while being actuarily sound, equitable, and easier to understand for insurance agents, floodplain managers, and the general public.

Important Dates

• October 1, 2021: Phase I of the rollout went into effect. Under Phase I, new policies will be subject to the new rating methodology and property owners renewing existing policies will be eligible to take advantage of any discounts in rates.
• April 1, 2022: All remaining policies begin being phased in during policy renewal, including policies where premiums increase. This phased approach will allow time for existing policyholders to see the new rates and consider any mitigation steps they could take to lower their future insurance premiums.

While each property is unique, most policyholders can expect to see a reduction or nominal increase in premium costs. Overall, only 4% of policyholders nationwide are expected to see increases greater than $20 per month. Because Risk Rating 2.0 considers rebuilding costs, FEMA maintains that this system will help equitably distribute premiums across all policyholders based on home value and a property’s unique flood risk.

Additional Resources

The Association of State Floodplain Managers (ASFPM) put together talking points and resources to help floodplain managers answer questions and assist the public with the transition to Risk Rating 2.0. Key points are summarized below, and the full article is available on the ASFPM website.

1. Risk Rating 2.0 is a system for establishing flood insurance premiums. This system does not change how Flood Insurance Rate Maps (FIRMs) and Flood Insurance Studies (FIS) are used for floodplain management and regulatory purposes.
2. Risk Rating 2.0 uses new technology and expanded data sources to establish the new risk-informed rating plan that incorporates a broader range of flood frequencies and sources. With this enhanced evaluation, NFIP premiums will reflect an individual property’s flood risk, rather than national averages.
3. FEMA has partnered with the United States Army Corps of Engineers (USACE) to develop a better-informed yet simpler approach to rating structures protected by levees.
4. In terms of equity related to cost, it appears that Risk Rating 2.0 will decrease flood insurance rates for lower value homes and potentially increase premiums for policies covering more expensive homes. While this doesn’t solve the flood insurance affordability problem for some, an unexpected and welcome benefit of Risk Rating 2.0 will likely be greater equity in the NFIP.
5. The new rating engine is expected to help insurance agents more easily price and sell policies while providing transparence to property owners to better understand their property’s flood risk and how it is reflected in the cost of their insurance.

For more information, ASFPM is hosting a series of webinars for floodplain managers to discuss the details on the new flood insurance rating methodology under Risk Rating 2.0.