Congressional Research Service: ‘National Flood Insurance Program Risk Rating 2.0

WASHINGTON, April 8 (TNSRep) — The Congressional Research Service published the following preview (#IN11777) updated on April 4, 2022titled “National Flood Insurance Program Risk Rating 2.0: Frequently Asked Questions” by Diane P. Hornflood insurance and emergency management analyst:

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This overview answers some frequently asked questions about Risk Scoring 2.0, which went into full effect on April 1, 2022, changing the way the National Flood Insurance Program (NFIP) calculates flood insurance premiums. For more information, see CRS R45999, National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0, by Diane P. Horn.

What is Risk Rating 2.0?

Risk Rating 2.0 is a new rating methodology and represents the biggest change in how the NFIP calculates flood insurance premiums since the program began in 1968. Premiums calculated under Risk Rating 2.0 reflect the specific flood risk of an individual property and several types of flood risk, as opposed to being placed in a general risk category based on location and type of property.

Why is NFIP introducing Risk Rating 2.0?

The NFIP has updated its pricing methodology to calculate flood insurance premiums for individual properties based on actual flood risk. This is intended to produce fairer rates and inform policyholders of their true flood risk.

When does Risk Scoring 2.0 start?

New NFIP policies written on or after October 1, 2021, used the new methodology. Since April 1, 2022all policies are priced using Risk Rating 2.0 methodology and will transition to Risk Rating 2.0 pricing upon renewal.

How were flood insurance premiums calculated before?

The NFIP rating structure followed the general insurance practices in place when the NFIP was created and has not fundamentally changed since the 1970s. It used several basic characteristics to classify properties and assign rates. Structures were rated by location within a flood zone on a Flood Insurance Rate Map (FIRM), occupancy type, and elevation relative to Base Flood Elevation (BFE).

This rating system did not consider individual flood risk or reconstruction cost and considered only two sources of flood risk: river flooding and coastal flooding.

How are premiums calculated with Risk Rating 2.0?

Premiums are calculated based on the specific characteristics of an individual property, including distance from water, flood type, flood frequency, structure foundation type, floor height lower compared to the BFE and the value of the replacement cost of the structure. The 2.0 risk rating also adds the risk of storm flooding – flooding due to heavy rain.

Will subsidized premiums increase with risk rating 2.0?

Risk Rating 2.0 continues the phase-out of NFIP subsidies, which began with the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and continued with the 2014 Homeowners Flood Insurance Affordability (HFIAA) Report. Properties currently grandfathered will see their premiums move to a full risk-based rate below the 2.0 risk rating. New policies and those renewing under the 2.0 risk rating will not be grandfathered, but will be limited by statutory rate increases. All new policies will pay the full risk-based rate.

How much can premiums increase each year?

The NFIP is unable to increase rates beyond the legal limits set in the HFIAA, which allow premium increases of up to 18% per year for primary residences. Other property categories must see their premium increased by 25% per year until they reach the full risk-based rates, including (1) non-primary residences; (2) non-residential properties; (3) commercial properties; (4) properties with severe repetitive losses; (5) properties with significant cumulative damage; and (6) properties with substantial damage or substantial improvement after July 6, 2012. In the first year of Risk Rating 2.0, bonuses are capped at $12,125 for single-family homes.

My premium drops below the 2.0 risk rating. When can I downgrade?

Any insured who renews his contract on or after April 1, 2022, will do so under the 2.0 risk rating. Premium reductions under Risk Rating 2.0 take effect upon renewal.

Are there discounts for flood mitigation activities?

Policyholders can receive mitigation credits to raise a property, elevate machinery and equipment above the lowest floor, and install flood openings below the BFE. All policyholders in Community Rating System (CRS) communities are eligible for discounts of 5% to 45%, depending on the community’s CRS score.

How have average NFIP premiums changed in recent years?

Since HFIAA, average NFIP premiums have increased by 6% to 11% per year (see Table 1).

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Table 1. Percentage increases in selected NFIP premiums, rates 2015-2021

[View table here: https://crsreports.congress.gov/product/pdf/IN/IN11777]

Source: Compiled by CRS from WYO annual bulletins.

Note: Rate increases for 2021 do not include changes from Risk Rating 2.0.

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Does being mapped in another flood zone affect bounties?

No, flood zones are no longer used in the premium calculation for a property below the 2.0 risk rating. Instead, premiums are calculated based on the specific characteristics of an individual property. FIRMs are still used for mandatory purchase requirement and floodplain management.

Does the Risk Rating 2.0 change the requirements by Buy flood insurance?

No, if a property is in a Special Flood zone (SFHA), the homeowner is required to carry flood insurance to secure a federally guaranteed mortgage. Lenders use FIRMs to make this determination.

Can new premiums under the 2.0 risk rating be appealed?

No appeal process has been established for changes under the 2.0 risk rating. Policyholders can appeal against NFIP flood maps, but this will not change insurance premiums.

How do NFIP premiums change in my state under the 2.0 risk rating?

FEMA released state profiles showing changes under the 2.0 risk rating, and county and zip code level data can be downloaded. The State Floodplain Managers Association released an interactive map showing planned premium changes under the Risk 2.0 rating at the state and zip code level.

Are premiums under the 2.0 risk rating affected by changes in flood risk under climate change?

Premiums for a single year will not increase due to future climate change. However, if the risk of flooding increases over time, the premiums will increase to reflect the increased risk.

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See the preview here: https://crsreports.congress.gov/product/pdf/IN/IN11777

Ryan H. Bowman