How Do Ratings Affect Flood Insurance Premiums?

COURT HOUSE – Cape May County property owners had just over 53,000 policies with the National Flood Insurance Program (NFIP) in 2019, covering $12.7 billion worth of property and furnishings. 
For that coverage, they paid over $36 million in premiums and fees. Flood insurance is big business in the county and actions that can result in premium reductions are similarly important business.
Across the county 12 of the 16 municipalities are Community Rating System (CRS) communities, meaning they participate in the Federal Emergency Management Agency (FEMA) program that offers various insurance discounts based on a community’s voluntary efforts in community floodplain management, making the insured property in the community safer for flood risk.
In Cape May County the 12 municipalities participating in the program have ratings that offer property owners anywhere from zero to 35% discounts on flood insurance premiums. 
The four other communities may have NFIP policies in force but their lack of participation in the CRS program means that property owners receive no rate reductions.  
In New Jersey as a whole 553 communities have policies in force through the NFIP. Of those communities, 96 participate in the CRS program.
The top 50 communities in the state in terms of NFIP policies in force include 10 county municipalities, 11 of which are in the CRS. 
Middle Township ranks 44th in the state in terms of policies in force with NFIP and is one of only seven in the top 50 that are not part of CRS.
CRS Ratings in the County
FEMA uses the CRS program to incentivize flood mitigation efforts that reduce the potential for the loss of life and property due to flooding. The program contains a changing mix of measures that a community can take to proactively reduce risk.  
Points are awarded based on the levels achieved in each area or measure. These change over time as FEMA priorities shift and as flood threats change. Participation in the program commits communities to an on-going set of proactive activities that allow them to build points toward higher levels of discounts on flood insurance premiums.
A CRS class can be within the range of 1, the highest, to 10, the lowest.
A community with a 10 is in the program but has yet to amass at least 500 points toward a potential discount in premiums. 
In Cape May County, West Wildwood is a class 10 in the CRS rankings. Like the communities that do not participate in the CRS – Dennis Township, Middle Township, West Cape May and Woodbine Borough – West Wildwood residents are not entitled to a discount on insurance.
For each class from 10 to 1, movement from class to class is in 500 point increments and each move up in class carries with it a 5% discount on insurance premiums. 
At the top is a class 1 community that receives a 45% discount on premiums. The highest rating in Cape May County is a class 3, a level that only 13 communities in the country and two in the state have achieved. 
The two are Sea Isle City and Avalon. Property owners will be entitled to a 35% premium reduction.
The county has four communities with a class 5 rating. They are Ocean City, Stone Harbor, Upper Township, and Wildwood. This rating carries a 25% discount.
Those rated class 6 in the county include Cape May, Cape May Point, North Wildwood, and Wildwood Crest. A class 6 community gets a 20% discount.
The county has one class 7 community which was not in the CRS rankings in 2016, Lower Township. A class 7 gains property owners a 15% discount in premiums.
How the System Works
How does a community amass points and gain higher levels in the CRS rankings?
FEMA has a variety of activities organized under four broad categories. The four categories are public information, mapping and regulation, flood damage reduction and warning and response. 
By pursuing credible activities within those categories and achieving proscribed levels of results, communities gain points. Aggregated points lead to class levels and associated premium reductions. The activities must be measured by the CRS.
Public information activities include advising people about flood hazards, encouraging the purchase of flood insurance, and providing information on ways to reduce flood damage. It represents an ongoing public awareness and education effort.
Mapping and regulations might include preservation of open space, managing stormwater and imposing higher regulatory standards to reduce flood risk.
Flood damage reduction involves the development of comprehensive floodplain management plans, relocation or retrofitting flood-prone structures and maintaining drainage systems.
Under warning and response, typical activities might include activities that protect life and property during a flood. An example might be the preparation of a response to the potential failure of levees or dams.
Points are not easy to gain and they require ongoing commitment since FEMA priorities are continuously evolving.  
The payoff as FEMA sees it is in enhanced public safety, reduction of potential flood damage and better protection of the environment.
The incentive is premium reductions; the goal is flood mitigation and better floodplain management.
What Does NFIP Cover?
Just recently the NFIP celebrated its 50th anniversary. Created by the National Flood Insurance Act of 1968, the government-run flood insurance program supplies affordable flood insurance to property owners and encourages communities to adopt floodplain management regulations.
Over 22,000 communities across the country are part of the NFIP. The average cost for flood insurance nation-wide is about $700 per year according to 2019 FEMA data. In Cape May County, the mean premium varies by municipality based on several variables including the CRS class.
FEMA 2019 data for premiums paid by communities in the county and number of policies in force produce an average premium across the county of $680, very much in line with FEMA’s national estimate.  
The highest average premium in the county is in West Wildwood at $1,110. The lowest is in Sea Isle City at $490 annually.
The NFIP covers insurance against flood damage for the home with a cap of $250,000 and for personal property with a cap of $100,000. An individual can buy one or both.
In Cape May County, aggregate coverage in 2019 ranged from a high in Ocean City of just over $4 billion to a low in Dennis Township of $15.4 million.
NFIP Reform?
 On Dec. 20, 2019, President Trump signed legislation that extended the NFIP to Sept. 30, 2020. In recent years small extensions of the program have essentially left open the issue of major program reforms.
Up until 2004, the program’s cost was fully covered by premiums. Since then the NFIP has run up billions in deficits due to the extraordinary losses associated with a series of superstorms like Katrina and Sandy.
The future shape of the program is unclear. Many pundits have argued that one necessary reform is to bring premiums better in line with risks. That means higher premiums and it increases the importance of flood mitigation activities like those included in the CRS program.
To contact Vince Conti, email vconti@cmcherald.com.