Justin Kraus in Legal/Financial on October 14, 2021
Created by Congress in 1968, the National Flood Insurance Program (NFIP) was doomed from the start. The premiums the program collected never kept up with the losses it covered, requiring the federal government to pump in more and more money. Climate change has made a bad system worse. If it were a private insurance carrier, the NFIP would have gone bankrupt long ago.
To remedy this and other problems, the Federal Emergency Management Agency (FEMA), which runs the NFIP, has come out with Risk Rating 2.0, a new system designed to bring fairness to the pricing of flood insurance premiums. Beginning on Oct. 1, pricing for new customers is based on several factors: distance to a major flood source; types and frequency of flooding; the characteristics and quality of the insured property; and, for the first time, the cost to rebuild after a major flood. For customers renewing existing policies, the new rates will go into effect on April 1, 2022.
Before Oct. 1, the average annual premium was $739, and it was based largely on whether the property was in the so-called 100-year flood plain, meaning it was likely to flood during a major storm. That system subsidized wealthier coastal residents. Now, for the first time, rates will be based on risks facing each individual property. (Properties located in high-risk zones with federally backed mortgages are required to carry flood insurance, whether through NFIP, a private carrier or a combination of the two.)
FEMA is promoting the fact that 25% of insureds with NFIP policies will see a premium decrease under Risk Rating 2.0, but that means that 75% of insureds will see a premium increase. We have a client who owns a single-family home in a Low-Risk Flood Zone, whose premium, had he accepted our quote earlier in the year, would have been $633. Under Risk Rating 2.0, that rate jumped to $2,301 for the year.
The belief is that most of the larger rate increases will affect single-family homes, but co-ops and condominiums located in high-risk zones will probably see hefty increases as well – about 10% to 12% on average. (By law, annual increases are capped at 18%.) Larger buildings, of course, will be able to spread a rate increase among a larger pool of residents, softening the sting for individual shareholders and unit-owners.
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FEMA Risk Rating 2.0 is going to cause a major uproar within the coastal insurance market. On the bright side, you can lower your premium by taking defensive measures, such as raising the machinery and equipment above the ground floor. Boards might also consider installing flood vents on the ground floor and flood gates on all openings. While these latter measures won’t reduce insurance premiums, they will likely reduce the severity of damage from a flood.
I suspect that more private flood insurance carriers will enter the market in the near future as they now have a chance to take advantage of higher rates. In fact, the insurance industry – along with environmentalists and Taxpayers for Common Sense – is among the supporters of Risk Rating 2.0. Among the opponents are 38 members of Congress who sent a letter to Speaker Nancy Pelosi, urging her to block the new pricing system.
Personally, I feel Risk Rating 2.0 is going to do more harm than good. As FEMA noted, the majority of policy holders are going to see a premium increase, and some will be substantial. I don’t think this addresses the larger concerns of climate change and tidal heights. I think we should apply money and research toward flood mitigation, like the Dutch have done with dikes, barriers, pumps and flood gates. These types of options may work better at protecting our business, our infrastructure and our homes.
Justin Kraus is personal lines manager at the insurance brokerage Mackoul Risk Solutions.
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