NFIP’s Updated Flood Risk Methodology
Since the 1970s, rates have been predominantly based on relatively static measurements, emphasizing a property’s elevation within a zone on a Flood Insurance Rate Map (FIRM).
This approach does not incorporate as many flooding variables as Risk Rating 2.0. Risk Rating 2.0 is not just a minor improvement, but a transformational leap forward. Risk Rating 2.0 enables FEMA to set rates that are fairer and ensures rate increases and decreases are both equitable.
FEMA is building on years of investment in flood hazard information by incorporating private sector data sets, catastrophe models and evolving actuarial science.
With Risk Rating 2.0, FEMA now has the capability and tools to address rating disparities by incorporating more flood risk variables. These include flood frequency, multiple flood types—river overflow, storm surge, coastal erosion and heavy rainfall—and distance to a water source along with property characteristics such as elevation and the cost to rebuild.
Bottom Line? Risk Rating 2.0 will transition individual properties to their actuarial rate for their property for both residential and commercial building owners. Some building owners will see their rates reduced, others will see an increase each year (capped at 18-25%) until their actuarial rate is reached.
What’s Not Changing Under Risk Rating 2.0
We are upholding statutory requirements by:
- Limiting Annual Premium Increases Existing statutory limits on rate increases require that most rates not increase more than 18% per year for buildings built after the establishment of their Flood Insurance Rate Map and 25% for those built prior to the FIRM.
- Using Flood Insurance Rate Maps (FIRMs) for Mandatory Purchase and Floodplain Management. FEMA’s flood map data informs the catastrophe models used in the development of rates under Risk Rating 2.0. That is why critical flood mapping data is necessary and essential for communities. It informs floodplain management building requirements and the mandatory purchase requirement.
We are maintaining features to simplify the transition to Risk Rating 2.0 by offering premium discounts to eligible policyholders. This means:
- FEMA will continue to offer premium discounts for pre-FIRM subsidized and newly mapped properties.
- Policyholders will still be able to transfer their discount to a new owner by assigning their flood insurance policy when their property changes ownership.
- Discounts to policyholders in communities who participate in the Community Rating System will continue.
How does Risk Rating 2.0 affect the grandfathered rating discount?
Grandfathering has been available to policyholders when a map change results in either a rating zone or base flood elevation change. However, since Risk Rating 2.0 will be able to provide each building’s individual flood risk, all policies formerly eligible for grandfathering will transition to their new full-risk premium.
Increases will be gradual and within the 18% annual cap imposed by Congress. Decreases will apply upon first renewal on or after October 1, 2021. Similar to other policies, some premiums will decrease, some will increase, and some will stay about the same.