On Friday, October 1, changes referred to by FEMA as “transformational,” will begin to affect how flood insurance risks and rates are determined. These changes were the result of more than 10 years of work by the National Association of REALTORS® (NAR) with FEMA to find a long-term, equitable solution to an inherently flawed and inequitable system.
Florida REALTORS® were host to a webinar on September 28 to outline changes to FEMA’s National Flood Insurance Program’s (NFIP) Risk Rating 2.0 and review how agents can help prepare and support their clients. The program rolls out in two parts, October 1, 2021, for new policies, and April 1, 2022, for existing policies and renewals.
NAR’s advocacy began following the passage of the Biggert Waters Flood Reform Insurance Act in 2012 and the Homeowners Flood Insurance Affordability Act in 2014 and continued with the formation of the NAR Insurance Committee and the hiring of actuaries to work with FEMA, to the most current work leading to NFIP Risk Rating 2.0.
“The NFIP as is not sustainable for taxpayers or owners,” said Cyndee Haydon, NAR Insurance Committee Vice-Chair.
She explained that since the 1970s, the NFIP collected $60 billion in premiums but paid out $95 billion, not including claims from 2021’s Hurricane Ida, which could reach $5 billion.
Further, while NAR advocacy helped to create a glide path to higher insurance rates created under Biggert-Waters, rates continue to increase. Currently, a $250,000 policy faces annual increases of 18 to 25 percent until it reaches $63,000 a year.
NAR’s Austin Perez, Senior Policy Representative – Insurance, outlined other issues with the previous system:
- NFIP rates were determined using a system created 50 years ago incorporating only two pieces of information: base flood elevation and Special Flood Hazard Area.
- Neighbors can have vastly different rates depending on where a creek or river flows. “The problem, of course, is that water doesn’t respect flood zones,” Perez said. So low-risk homes can be charged the same as high-risk homes and vice versa.
- Repetitive Loss Properties: rates don’t account for homes that have had multiple claims
- Many homeowners pay more than their share of the risk. Perez demonstrated with a home in Columbus, Ohio, that pays the same rate as an identical home in Pinellas County.
- While Elevation Certification can help lower rates, the process is highly complex and often subjective.
Risk Rating 2.0
Described as a product of collaboration and science, Risk Rating 2.0 removes and replaces the former “two points of data,” practice and evaluates homes individually.
With the help of a cross-functional team of academics, engineers, mappers, underwriters, mitigation experts, actuaries, building sciences, insurance industry experts, the NAR Flood Committee took practices and technologies developed in Florida since Hurricane Andrew and made it the core of 2.0, Perez said.
Risk Rating 2.0 now takes into account multiple variables, including distance to water, cost to rebuild, river class, flood type, ground elevation, first-floor height, construction/foundation type and a broader range of flood frequencies. Further, instead of using only FEMA-sourced data, it also can use commercially available third-party data.
More important, each home is evaluated on its unique flood risk.
The result should be a more equitable application of rates and, for many homeowners in lower risk situations, a reduction in rates.
“At the end of the day, as a REALTOR®,” Haydon said, “we wanted something equitable and affordable. We want people to be able to plan.”
Moving forward, buyers:
- Will know a home’s actuarial rate.
- Can make better long-term decisions.
- Will have a firmer idea of the cost of future flood insurance.
- Can assume seller’s NFIP Policy.
In other words, Hayden said, a buyer can make a better-educated decision and is less likely to face heartbreaking decisions about having to a sell home that has become unaffordable or wondering if they can retire in that home due to unanticipated insurance cost increases.
Risk Rating 2.0 in summary:
- The maximum rate is now $12,125 a year (a 73 percent decrease.)
- 23 percent of policyholders will see an immediate decrease; most will pay the same.
- Buyers can get quotes immediately without waiting for the Elevation Certificate, although the certificates could still present savings for some homeowners.
- Fewer policyholders will see big increases.
- Lower value homes don’t subsidize high-value homes.
- All policies (even X zone) get property-specific rates and mitigation discounts, including Community Rating System (CRS) discounts.
- Buyers can shop the private market and make a choice.
What’s not changing:
- Resident and commercial policy coverage.
- Buyers can still assume/transfer the sellers’ policy and buyers won’t face a big jump in rates in Day 1.
- The statutorily protected 18 to 25 percent cap on annual increases.
- Using Flood Insurance Rate Maps (FIRMS) for mandatory purchase and floodplain management. In other words, homeowners still must have flood insurance if they are in a Special Flood Hazard Area and have a federally backed mortgage.
- CRS discounts of 5 to 45 percent.
Recognizing there are always bumps in a new process, RR 2.0 will roll out in two phases.
Beginning October 1, 2021, new policies will be subject to the new rating methodology and existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums.
Beginning April 1, 2022, all remaining policies will be subject to the new rating methodology.
Hayden advised REALTORS®:
- Prepare your clients that change is coming.
- Use NAR resources (NAR is preparing a consumer flier and other materials.)
- Be their calm professional: Get the facts.
- Ask: Does the seller have a flood policy? If the seller has an existing NFIP policy, buyer has the option of assuming.
- Advise buyers to start early in the process and work with an experienced and knowledgeable flood insurance agent.
- Don’t assume; remember our license and training.
Bring Value to Your Client and Sphere
- Share our 10-year journey and how you (REALTORS®) have advocated through NAR and RPAC to achieve this for your neighbors and the communities you serve- OWN IT!
- Get the facts about flood insurance and be proactive and bring information and value updating clients and sphere-handout the FEMA NAR Flyer.
- You can help connect them with insurance agents who specialize in flood insurance so they can get all their options.
- Be a resource and advocate to help them escalate any issue to FEMA or NAR if they arise.
NFIP and Risk Rating 2.0 Resources:
- FEMA Risk Rating 2.0 NFIP Transformation
- Risk Rating 2.0 Graphs for Florida Counties
- FloodSmart.gov Definitions
- FEMA Risk Rating 2.0 for all States (County and Zip Code)
- FACTS + Statistics: Flood Insurance
The National Association of REALTORS® also held a Townhall:
FEMA Townhall Recording: https://www.nar.realtor/videos/nar-town-hall-featuring-fema-senior-executive-david-maurstad
NAR Rating 2.0 Landing Page: https://www.nar.realtor/national-flood-insurance-program/fema-risk-rating-2-0-equity-in-action.