How Risk Rating 2.0 Will Affect Flood Insurance Policies

Flood insurance premiums will rise on more than 3.8 million policies, though only 4% of all policies will see the greatest increases after FEMA's new methodology is implemented. Here are the breakdowns by state and county.

The Federal Emergency Management Agency (FEMA) is taking steps to assess the flood risk that homeowners face more effectively. The National Flood Insurance Program (NFIP) of the Federal Emergency Management Agency (FEMA) recently released new flood insurance rating procedures designed to equitably distribute the cost of insurance for potential flood damage based on the risk a property faces.

FEMA estimates that Risk Rating 2.0, which goes into effect in October, will result in immediate cost savings for 23% of existing policies across the 50 states and the District of Columbia. While nearly 1.2 million policies will have their costs reduced, more than 3.8 million will have their rates raised.

It is estimated that only 4% of existing policies in the United States will face the highest rate hike — more than $20 per month, or $240 per year. However, due to the geographic factors that influence flood insurance costs, some states are more likely to see the highest increases. In fact, more than 10,000 policies in Florida, Texas, Louisiana, New Jersey, and New York will see price increases.

FEMA's rate changes promise to set right the problem of policyholders paying rates that don't reflect the true risk they face

Risk Rating 2.0, which goes into effect on Oct. 1, incorporates a wide range of variables to produce a more realistic estimate of a community's flood risk.

According to FEMA, Risk Rating 2.0's improved flood assessment tools will address the issue of policyholders with lower-valued properties paying rates that do not accurately reflect the risk that a higher-valued home faces.

Prior to Risk Rating 2.0, the agency primarily evaluated flood risk by using flood zone maps, which communicate the likelihood of a 100-year flood event inundating an area. On paper, this equates to a 26% risk of flood damage over the life of a conventional 30-year mortgage.

FEMA can illustrate the unique risk a property faces by moving away from reliance on flood zone mapping to show a community's flood risk. Risk Rating 2.0 calculates a property's risk based on a number of factors, including:

• Inland flooding is possible.
• Storm surges in the past
• The cost of rebuilding the property
• Losses in the past
• Elevation
• Natural environments and barriers

Though many homes will see marginally higher flood insurance rates after Risk Rating 2.0 goes into effect, existing annual rate increase limits will remain in effect. This means that most homes will not see price increases of more than 18% year over year.

New rates will more accurately reflect risk, with nearly 1.2 million policies seeing immediate discounts — but most people will see rate increases

FEMA divides its projections for rate changes into four categories:

• Immediate discounts
• Increases of $10 or less per month
• Increases ranging from $10.01 to $20 per month
• Monthly increases of more than $20

The number of in-effect policies that FEMA estimates will be affected by each tier is listed below:

Risk Rating 2.0 will reduce the cost of existing policies in 23 percent of cases across the country. Eighty-four percent of Alaska policies are likely to have lower rates after implementation, but the state only has 2,300 policies in effect.

Maryland and Michigan residents are far more likely to benefit from FEMA's policy change. Sixty-one percent of Maryland's 65,000 flood insurance policies and 54 percent of Michigan's 20,500 policies will see immediate cost reductions as a result of FEMA's rating changes. Alaska, Maryland, Michigan, Utah, and the District of Columbia are the only states where more than half of the current policies will be cheaper.

Meanwhile, 77 percent of existing policies in the United States will see a price increase. The proportion of policies that will cost more after Risk Rating 2.0 varies by state. For example, 86 percent of policies in Texas will be more expensive after October, trailing only Hawaii at 87 percent.

Only 4% of policies, or nearly 193,000, will see rate increases of more than $20 per month. Fewer than 1,000 existing policies will face the greatest price increase in more than half of the states (27). However, there are more than 10,000 existing policies in five states, including some of the nation's most populous, such as Florida, Texas, and New York, that FEMA estimates will result in rate increases of at least $20 per month.

Of the more than 5 million active policies, 77 percent will see some increase, while 4 percent will see a per-month cost increase of more than $20.

68% of the policies in the counties where flood insurance is most common are going to increase in price because of Risk Rating 2.0 — while 18% of these policies will decrease by more than $240 a year

LowCostInsurance also investigated the impact of Risk Rating 2.0 at the county level. The researchers looked at the top 25% of counties — 760 in total — where flood insurance policies are most common.

With the implementation of Risk Rating 2.0, the price of 68 percent of existing policies in these counties will rise.

This means that 32% of policies in these areas will either remain the same or become cheaper. The NFIP’s projections allow LowCostInsurance to break down these numbers further. Despite the fact that rates on more than two-thirds of these policies will rise, only 4% of existing flood insurance plans will see monthly increases of more than $20. At the same time, the cost of flood insurance will be reduced by more than $20 per month for 18% of policies in these counties.

Flood insurance policyholders in Pacific County, Washington, are the most likely to see rate increases. According to LowCostInsurance, the implementation of Risk Rating 2.0 will increase the cost of 98 percent of policies in the country. At the same time, just 1% of the population will see a monthly increase of more than $20.

Prices are expected to rise the most in Hunterdon County, New Jersey, where nearly one-quarter (24 percent) of flood insurance policies will cost more than $20 per month as a result of Risk Rating 2.0.

Prices in Ector County, Texas, on the other hand, are expected to fall the most. In this case, 67 percent of the existing policies will be reduced in price by more than $20 per month. In Anchorage Municipality, Alaska, policies are most likely to be reduced by any amount (96 percent ).

The counties in this table are ranked by the number of active flood insurance policies. The counties depicted are among the top 50 in terms of the number of flood insurance policies in force.

How premium changes compare across states in counties with the most flood insurance policies

The researchers also looked at how the cost of flood insurance will change in the counties with the most policies in each state. Because of Risk Rating 2.0, 80 percent of policies in Fairbanks North Star Borough, Alaska, will be more affordable. In contrast, policies in Nye County, Nevada, are most likely to increase — 96 percent will cost more.

Prices in York County, Maine, are expected to rise the most, with 14% of flood insurance policies increasing by at least $20 per month.

What consumers need to know about flood insurance

Consumers should be aware of the limitations of a federally backed policy, aside from how Risk Rating 2.0 affects the cost of coverage in their areas.

The NFIP's flood insurance usually has a 30-day waiting period before it takes effect. Because home insurance does not cover flood damage, between the time a consumer purchases a policy and the date that policy becomes effective, the policyholder effectively has no coverage from flood damage. To maximize their protection, consumers should purchase NFIP coverage ahead of the typical storm season.

Unlike an NFIP policy, private flood coverage has a shorter waiting period of 10 to 14 days before it takes effect. While private flood insurance policies are generally (but not always) less expensive and allow for greater customization than a federally backed policy, the NFIP's national availability and disaster-tested history may make it more appealing to many consumers — and mortgage lenders who require flood insurance.

Those who own expensive homes and require additional flood insurance coverage may be more inclined to consider a private policy. The NFIP allows consumers looking for residential flood insurance to purchase up to $250,000 in dwelling coverage and $100,000 in contents coverage. Private flood insurance, on the other hand, allows policyholders to purchase much higher limits of protection when it is available. Consumers can also add $30,000 of compliance coverage to their NFIP policy, which goes toward flood-resistant construction.

Methodology

LowCostInsurance compiled data from the Federal Emergency Management Agency's (FEMA) National Flood Insurance Program (NFIP) on the number of policies in force and those expected to decrease or increase following the implementation of Risk Rating 2.0. The NFIP classified policies into four categories in its Risk Rating profiles based on estimated rate changes:

• Immediate reductions in flood insurance costs
• Increases of more than $0 but no more than $10 per month
• Increases of $10.01 to $20 per month
• Increases of more than $20 per month

The first section of this research looks at rate changes in each of the 50 states and the District of Columbia. For the latter part, LowCostInsurance researchers examined data at the county level as well. This section of the study computes the percentage of policies that are increasing and decreasing, as well as those that are increasing or decreasing by more than $20 per month. Although analysts have data on all U.S. counties with more than five flood insurance policies, this study only shows the top quarter of counties with the most flood insurance policies.