The Federal Emergency Management Agency (FEMA), which administers the National Flood Insurance Program (NFIP) announced Risk Rating 2.0, a new effort designed to improve how the NFIP determines flood risk and flood insurance premiums. It purports to leverage industry best practices and technology; however, by most accounts, Risk Rating 2.0 will increase premiums and decrease property values.
The following excerpts, originally published by Bloomberg News via Digital Insurance, provide an overview.
Flood insurance premiums could rise and property values fall in the most deluge-prone areas under a plan the Trump administration intends to roll out in coming weeks to change the way risk is calculated under the National Flood Insurance Program.
Instead of simply focusing on whether a home is inside or outside of the 100-year flood plain, the Federal Emergency Management Agency plans to use private-sector data to calculate the real flood threat for each home and set costs based on that data, according to people familiar with the effort and a briefing document obtained by Bloomberg.
The overwhelming majority of American households with flood coverage receive their policies through the National Flood Insurance Program, which covered about 5 million policyholders in 2017. Despite the growing risk of flooding due to climate change, the number of policies under the program has fallen about 10 percent from its peak in 2009.
The initiative, which FEMA calls Risk Rating 2.0, comes as climate change places growing pressure on the publicly subsidized flood insurance program. Claims often outpace premiums, saddling the program with a debt that topped $30 billion in 2017. The models that determine those rates ignore certain kinds of flooding, such as intense rainfall. And many Americans at risk of flooding nonetheless don’t buy insurance.
The new system is designed to address some of those problems. The agency plans to pair its existing mapping data with “commercial catastrophe models,” as well as the “geographic and structural characteristics” of the home, according to a briefing document presented by FEMA to private flood insurance representatives in October and obtained by Bloomberg.
The same document, dated Oct. 17 2018, said that FEMA would first introduce the new risk rating system for states along the Gulf Coast and Southern Atlantic, from Texas to North Carolina. New rates would begin to take effect in 2020.
A FEMA spokeswoman said parts of the document were no longer accurate, but declined to say which ones.
“Our new system will determine a customer’s flood risk by incorporating multiple, logical rating variables –- like different types of flood, the distance a building is from the coast or another water source, or the cost to rebuild a home,” Maurstad [David Maurstad, deputy associate administrator for insurance and mitigation- FEMA] said.
The agency said it didn’t yet know what the effect of the new system would be on premiums. But rates are likely to go up in neighborhoods with the greatest exposure to flood risks, which could hurt property values in those areas, according to Michael Berman, a former chairman of the Mortgage Bankers Association who worked on housing issues for the Obama administration and has been briefed on the plan.
Increasing the cost of flood insurance tends to depress home values for two reasons, according to Asaf Bernstein, an economist at the University of Colorado at Boulder whose research includes asset pricing and household finance. Not only do higher premiums raise the cost of owning a home; they also act as a warning to potential buyers about the likelihood that a house will flood.Read the entire article at dig-in.com
Here are three important takeaways for property owners who are required to maintain flood insurance, especially those required to maintain flood insurance and have not filed any claims:
- Determining a property’s true flood risk requires more than identifying its location on a flood map. Neglecting factors such as elevation, flood source, current and historical Flood Insurance Rate Map (FIRM) data, and floodproofing, to name a few, will result in coverage and rates that do match the true level of risk. In other words, you may be paying too much or too little to protect the real estate investment.
- You should be troubled by the fact that nearly a quarter of flood losses and NFIP claim payments occur in non-SFHAs (Special Flood Hazard Areas). In other words, not only are you subsidizing properties that are truly at risk of flooding, but also carrying the weight of a debt-ridden government program.
- Knowing a property’s true flood risk saves money, prevents uninsured losses, and increases the real estate value.
For a better understanding of NFIP changes, factors that determine flood risk, and your structure’s exposure to flooding, contact us. We welcome an opportunity to deliver to you, your insurance and risk management representatives, an independent and complimentary review of properties in high-risk flood zones. You will learn whether the price you pay for coverage is justified, and better yet, whether a true assessment of the flood risk results in significant savings and increased property value.
Have you evaluated your flood risk lately? Feel free to post comments or questions.