Federal Emergency Management Agency (FEMA) Risk Rating
Home buyers already are experiencing changes in the National Flood Insurance Protection (NFIP) program’s new rating methodology that went into effect for new policies on October 1, 2021. Understanding the changes can help agents expertly guide clients purchasing properties in or near Florida flood zones.
The NFIP rating methodology had gone unchanged since the 1970s and previously did not consider individual flood risk and underlying home values. Since then, technology, access to data and even basic understanding of flood risk have improved, allowing homeowners to access rates that are easier to understand and more accurately reflect a property’s unique flood risk.
The new ratings will go into effect for existing policy renewals on April 1, 2022.
Austin Perez, Senior Policy Representative for the National Association of REALTORS®, worked with the Federal Emergency Management Agency, which administers NFIP, to help develop the new rating methodology. This work also was supported by the REALTOR® Political Action Committee (RPAC). Perez said previously 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.
Under that system, neighbors could have vastly different rates depending on where a creek or river flowed. “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.
Further, the old method didn’t consider homes that had multiple claims because of ongoing flood risk.
The outcome was that many homeowners paid more than their share of the risk, while others paid much less.
FEMA Risk Rating 2.0, called “transformational” by the agency, bases rates on individual properties and their unique risk.
Insurance is priced by incorporating common sense variables (e.g., more types of flood risk and distance to flooding source) into the rating methodology. It pairs state-of-the-art industry technology with the NFIP’s mapping data to establish a new risk-informed rating plan.
Cyndee Haydon, NAR Insurance Committee Vice Chair, said 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, she said, buyers:
- Will know a home’s actuarial rate
- Can make better long-term decisions
- Will have a firmer idea of 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 wonder whether 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% decrease)
- 23% of policy holders 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% 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%
