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How FEMA’s New Flood Risk Rating System Could Impact Your Clients

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This post is part of a series sponsored by SWBC.

The Federal Emergency Management Agency (FEMA) is responsible for identifying high-risk flood zones, which are then used to determine which areas homeowners with federally backed mortgage loans should obtain flood insurance.

In 2021, the FEMA National Flood Insurance Program (NFIP) is fully implemented New actions To classify flood risk for insurance purposes. Coined “Risk Rating 2.0”, the new system aims to more accurately reflect risk to property owners and more equitably distribute the cost of insurance for potential flood damage.

The purpose of the broader Risk Rating 2.0 hypothesis to make rates more actuarially accurate is to make premiums more directly correlated with the actual risk of individual properties and lend the government program solvency.

For example, under the previous rating system, there were many high-risk, high-risk beach properties for which landlords were paying relatively low premiums on their NFIP policies because prices were backed by low-risk properties for inland flooding. FEMA’s original classification methodology did not take things like this into account. RR2.0 will use data modeling that does this.

In the updated system, many of the old “ancestral” rules and synthetic subsidies that NFIP was providing prior to the removal of RR2.0 make private flood insurance more competitive.

In this blog post, we’ll discuss how FEMA’s new risk rating system may affect insureds’ need for more primary flood insurance options, and give you tips to share with them to ensure their properties are adequately covered.

How will FEMA’s new Risk Rating 2.0 affect my clients’ coverage and rates?

in recent conversation Hosted by the University of Pennsylvania’s Wharton Risk Center, flood risk analysis experts examined how RR 2.0 affects coverage for millions of policy holders:

While homes with existing policies are protected from price surges with a statutory 18% annual limit on increases, the law does nothing to protect homes that are currently uninsured. Due to a variety of systemic challenges around encouraging NFIP participation, this unfortunately accounts for the majority of homes with a high flood risk.

The most troubling aspect of the low acquisition rate is that it appears more pronounced for low-income families. This is self-evident because these families are less likely to be able to afford flood insurance in the first place. The median income for non-policy holders in flood zones established by FEMA was found to be just $40,000, barely more than half the median income of $77,000 for policyholders in flood zones. Unchecked increases in uninsured home prices will almost certainly exacerbate this equity problem and also focus market value shocks in communities that are least able to absorb them.

One concern is that unspecified RR 2.0 rates will not be accessible to new policy applicants (and those who previously vetoed their policies because they could not afford them) is unfortunately becoming a reality, as evidenced by the alarming decrease in the number of new NFIP policies created yet. Phase 1 of RR 2.0 which started on 10/1/2021.

This trend continued until 2022. The graph below shows the percentage of new policies created at new rates, versus renewals benefiting from protections that delayed increases until 4/1/2022. It seems reasonable to conclude from this analysis that indeterminate RR 2.0 rates are significantly higher than the older rates, further discouraging homeowners’ acceptance of flood insurance.”

New NFIP Percentage Chart by Actual Month

Image source: https://riskcenter.wharton.upenn.edu/lab-notes/riskratingburt/

As you can see, sales of the new NFIP policy are down compared to before RR2.0, but private flood insurance is growing rapidly. One reason for this is that every insurance company is willing to take an independent view of risk and these opinions will often differ somewhat.

Alternatives to NFIP Coverage

As a trusted insurance agent for your clients, they trust you to provide sound advice that will help protect their homes. For example, are they aware that flood damage is not covered by homeowners insurance? This is critical, because, according to FEMAJust an inch of flood water in their home can result in over $25,000 in property damage.

If your customers are concerned about raising rates under FEMA’s new risk rating system, they may want to explore private flood insurance options.

Here are some highlights of private flood insurance coverage that may help them understand the differences:

Higher Coverage Level: Private flood insurance generally provides a level of coverage above the NFIP limit of $250,000 on a home and $100,000 on a property.

Shorter waiting times: NFIP coverage usually takes 30 days to take effect, but with some private insurance companies, coverage can be applied in as little as a week.

Additional flood assistance: If your client has to move temporarily, private insurance may provide short-term housing. Depending on the policy, they can also purchase coverage for items or areas not covered by NFIP.

We hope your customers never have to use a flood insurance policy – but it’s always best to make sure they have adequate coverage in the event of a disaster.

SWBC’s Excess flood insurance Coverage exceeds the limits of standard coverage provided by NFIP. The program also covers funding for living expenses to help the insured through the transition process, something NFIP does not offer.

In addition, SWBC is rapidly expanding coverage to help agents reach new customers special flood Insurance options for their clients so that they can offer direct alternatives to NFIP.

Visit our website Learn more about our options for excess and private flood insurance.

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