FEMA to Change Flood Insurance Pricing

WASHINGTON – The Federal Emergency Management Agency (FEMA) is changing its National Flood Insurance Program (NFIP) pricing methodology beginning Oct. 1. 
The new pricing scheme, which FEMA calls a “transformational leap forward,” will incorporate more flood insurance variables, tying premiums directly to actual flood risk.
Since the 1970s, pricing for the NFIP premiums has been based largely on a property’s elevation within a zone on a flood insurance rate map. According to FEMA, this meant owners of higher value homes were “paying less than their share of the risk.” 
By incorporating more variables into the pricing methodology, including the cost to rebuild, FEMA argues the new pricing system will be more “equitable.”
FEMA dubs the new pricing methodology as Risk Rating 2.0. It represents the first substantial change in pricing determination in over 50 years.
The NFIP was established in 1968 to cover property in flood-prone locations. Currently, FEMA provides $1.3 trillion in coverage to over 5 million properties. The coverage has been a financial burden on the agency, which is $20.5 billion in debt.
First Street Foundation, a nonprofit research organization dealing with the country’s flood risk, released a study last month that said over 4 million homes in the nation face financial losses 4.5 times the cost of their NFIP premiums. The study also argues that the risks are increasing due to rapid climate changes. 
For the 1.5 million homes identified within Special Flood Hazard Areas (SFHA), First Street estimates the premiums would have to be raised 4.2 times current levels to an average of $7,895 a year. Properties within the SFHA are mandated to carry flood insurance if they hold federally backed mortgages.
The First Street study also estimates the growing risk of flooding by state. In New Jersey, First Street estimates over 94,000 residential properties have a substantial flooding risk. 
First Street estimates the properties will have a collective loss this year of $415 million. The study projects the average annual loss per property to grow by 53% over the next 30 years.
The foundation’s study sees Cape May and Ocean counties as NewJersey’s most vulnerable locations to the growing flooding risk.
The First Street estimates of flood insurance rates necessary to balance risk are not a projection of what FEMA’s rate structure will be, rather it is an analysis of where rates would have to be set for reasonable coverage if all the homes in the SFHA were part of the FEMA insurance program. The Insurance Journal reports that only about 30% of flood-prone properties carry NFIP coverage.
Insurance industry professionals expect the new methodology to result in some significant hikes in NFIP premiums for expensive properties in wealthy coastal communities.
The pricing methodology will go into effect Oct. 1 for new policies and April 1, 2022, for all other policies. FEMA estimates that over 1 million policyholders will see a decrease in premiums, reflecting the fact that those with less expensive properties shouldered more of the risk under the current pricing structure.
Variables of the new pricing methodology include a property’s value, flood frequency, risk of multiple flood types (e.g., storm surge, coastal erosion, heavy rainfall, and others), distance to water, and elevation.
Discounts to policyholders in communities who participate in the Community Rating System (CRS) will continue. The new pricing methodology may place more public emphasis on the local government’s ability to secure higher CRS ratings.
FEMA terms Rating Risk 2.0 “Equity in Action.” The agency provides a six-page summary of the new methodology (https://bit.ly/3mULoCg). A highlights document from First Street on its study “The Cost of Climate: America’s Growing Flood Risk” is also available (https://bit.ly/3spjD60). The full First Street study, which includes state breakdowns, is available in PDF format (https://bit.ly/3wQVeK1).
To contact Vince Conti, email vconti@cmcherald.com.