Much like the recipe for Pop Rocks, the National Flood Insurance Program (NFIP) has not had significant structural changes since the 1970s.

That, however, is about to change. The Federal Emergency Management Agency (FEMA) recently announced adjustments to the NFIP in the form of the new "Risk Rating 2.0 - Equity in Action" system, designed to provide actuarially sound flood insurance rates that are more equitable while at the same time provide a program that is easier for policyholders to understand. The changes are expected over the next year.

"The existing flood program is antiquated and over the years has only had stair-stepping rate changes but no material overhaul that reflects the actual exposures of structures," says Justin Wiebe, RPS Area Assistant Vice President.

With the NFIP providing around $1.3 trillion in flood insurance coverage for more than five million policyholders in 22,500 communities across the United States, "structural changes have to be made," says Wiebe.

How the New Flood Rates Work

Under the new Risk Rating 2.0 system, premiums will be based on a number of factors, including property value, distance from the ocean and the risk of rainfall-related flooding. The current structure bases rates on whether homes were inside a severe flood zone, and if so, their elevation within those zones.

In developing the new rates, FEMA coordinated with subject matter experts from the U.S. Army Corps of Engineers, U.S. Geological Survey and the National Oceanic and Atmospheric Administration, along with experts from across the insurance industry and actuarial science experts to ensure alignment with federal regulations, systems, guidance and policies.

"The new pricing methodology is the right thing to do. It mitigates risk, delivers equitable rates and advances the Agency's goal to reduce suffering after flooding disasters," explains David Maurstad, senior executive of FEMA's National Flood Insurance Program.

"Equity in Action is the generational change we need to spur action now in the face of changing climate conditions, build individual and community resilience, and deliver on the Biden Administration's priority of providing equitable programs for all."

What Does This Mean for Policyholders?

According to FEMA, under the new rating system, 23% of current policyholders will see premium decreases; 66% of current policyholders will see, on average, increases of up to $10 per month; 7% of current policyholders will see 10%-20% per month increases, and 4% of current policyholders (estimated at more than 200,000) will see, on average, a $20 or more per month increase. There is a cap of $12,000 a year, which could take years for homeowners to reach.

The burden of higher rates for flood insurance will hit the coastal states of California, Delaware, Florida, South Carolina and Washington the hardest, according to First Street Foundation, a non-profit research group that assesses flood risk.

These rate changes will take effect as follows: New policies beginning Oct. 1, 2021, will be subject to the new rating methodology. In addition, beginning Oct. 1, existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums. All remaining policies renewing on or after April 1, 2022, will be subject to the new rating methodology.

"With the new NFIP rating methodology, we will begin to see homes underwritten and rated more in line with how the private domestic and London markets approach writing the coverage," notes Wiebe, instead of having a blanket rate that applies to all areas across the country.

"If a home is in a hurricane-prone area, the homeowner will pay more for coverage. Also, if homes cost more to replace, the homeowners will pay higher premiums as they do in the standard private market."

Why Agents Should Put Flood Insurance Front and Center

Wiebe recommends that retail agencies step up their conversations with insureds not only about the changes that are set to come and how these changes will impact them, but also speak to clients who don't consider flood insurance a top-of-mind concern.

"Individuals may not think they have a flood exposure, but look what happened in the aftermath of Hurricane Harvey. Many losses were uninsured as the areas where flooding occurred were considered low-hazard zones," he notes.

"Additionally, zones over the years have been remapped and homeowners may not realize they have properties that are now located in a flood zone. The bottom line: No matter where you're located, a flood risk exists. Discussing flood insurance with both your personal and commercial clients can be a real differentiator for an agent."

Challenges to the New System

"There's been pushback by politicians afraid of the fallout from constituents who would be impacted by proposed rate changes, but the [current] program is treading water and is in debt to the tune of $20 billion. This after $16 billion was forgiven on the heels of Hurricanes Harvey, Maria and Irma. Structural changes to the program have to be made," says Wiebe.

In fact, according to an article in Forbes, the new rating system is already facing a challenge from New York Senator and Democratic majority leader Charles Schumer. Schumer, who represents Long Island, which was ravaged by Hurricane Sandy in 2012, has asked FEMA to "reconsider" and consult Congress before moving forward.

As always, RPS will monitor the changes as they develop.

Sources: FEMA, Bloomberg, Forbes