There’s still confusion around the National Flood Insurance Program’s new pricing methodology called Risk Rating 2.0: Equity in Action, which went into effect in October 2021. Cyndee Haydon, chair of the National Association of REALTORS®’ Insurance Committee and a broker-associate at Future Home Realty in Tampa, Fla., offers an update on what you need to know.
Q: What Is Risk Rating 2.0?
A: When developing flood insurance prices, the NFIP now rates each home individually—rather than by zone—using modern technologies, multiple flood risk variables and property-specific characteristics, including elevation, distance to water and cost to rebuild. A third of flood insurance policyholders are paying a full-risk rate while others are paying a subsidized rate that is gradually increasing to full risk over time. The new methodology does not affect flood mapping or the federal mandate to purchase flood insurance.
What’s Happening Now?
All NFIP policies have transitioned to Risk Rating 2.0 as of May 1, and there have been no reports of delays or disruptions to home sales. In fact, Risk Rating 2.0 can help real estate pros build trust with clients because it helps buyers understand the true actuarial rate over time before they purchase. The rollout of Risk Rating 2.0 has been surprisingly smooth, considering it’s the first major update to NFIP pricing in 50 years.
Why Were These Changes Needed?
After the passage of the Biggert-Waters Act in 2012, REALTORS® uncovered many problems with the previous flood insurance rating methodology, which had not been updated in a half-century. Risk Rating 2.0 was established as a result and provided much needed updates based on actuarial risk, science and common sense.
Here’s one example: Under the old methodology, an NAR member was quoted an annual rate of $87,000 for flood insurance on a $300,000 home. NAR asked FEMA and independent actuaries how the rate could be so high for the property, a modest home that never flooded, and no one could explain it. Under Risk Rating 2.0, FEMA now uses science to cap the maximum possible NFIP rate at $12,125 per year, which only a few high-value, high-risk property owners would pay. For that same $300,000 home, flood insurance now costs only $1,247 under the new rating system.
Because pricing in the old methodology was based on national flood zones, older and low-value properties subsidized new, high-value properties. NAR’s Insurance Committee collaborated with FEMA and funded an independent actuarial study to help propose a solution. As a result, Risk Rating 2.0 ensures that each property owner pays for only their own individual risk and no one else’s.
Risk Rating 2.0 also provides consumers with full disclosure on flood insurance rates. After the Biggert-Waters Act, I helped clients whose rates jumped over $10,000—and they were required to pay it in one lump sum after buying a home. Believe me, you don’t ever want to have to take calls like this from former clients. I didn’t sleep until Congress rolled back and put the rates on a glidepath with the Flood Affordability Act of 2014, which, unfortunately, was only a temporary measure. Risk Rating 2.0 provides a permanent solution, giving new NFIP policyholders the science-based, actuarially sound, full-risk flood insurance rates upfront before they purchase.
Why Do Some Say NFIP Rates Have Doubled or Tripled?
Rates have not doubled or tripled anywhere in the United States. Some media reports are taking out of context a FEMA projection of what the average full risk rate might look like given today’s conditions. However, those are not actual rates paid by two-thirds of policyholders, and by law, rates cannot increase more than 18% per year. Also, flood risk is dynamic: Many factors can impact the current projection, including future changes in climate, inflation and the policyholder population. What FEMA data shows is: 1) most policyholders are not paying a full-risk rate and 2) it will take at least five to 10 years before they do if all things stay the same. Here is the actual 2023 NFIP rate data.
Now that Risk Rating 2.0 is in place, NAR’s Insurance Committee is turning its attention to other priorities, including:
- NFIP reauthorization. Congress has passed two dozen short-term extensions while continuing to debate meaningful, bipartisan reforms for accurate mapping, affordability through risk mitigation and private flood insurance options. REALTORS® are urging Congress to pass a long-term reform and reauthorization measure that brings stability to real estate markets.
- Climate financial risk. Risk Rating 2.0 is only one example of a federal agency complying with an executive order to underwrite climate risk. Other federal agencies are currently evaluating their exposure to climate risk, which could have significant implications for federal mortgage loan programs, including Fannie Mae and Freddie Mac.
- Hazard Insurance. Most insurance policies cover typical disasters except floods and earthquakes. Rising costs are the number one insurance-related issue in many states, including Florida and Louisiana, and NAR’s Insurance Committee is working to develop a handbook to educate consumers.