Federal Flood Insurance gets makeover

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The Federal Emergency Management Agency is updating  National Flood Insurance Program’s pricing.

Risk Rating 2.0—Equity in Action, provides what FEMA describes as actuarially sound rates that are equitable and easy to understand, a release stated.

It changes a pricing methodology that has not been updated in 50 years.

“The new pricing methodology is the right thing to do. It mitigates risk, delivers equitable rates and advances the Agency’s goal to reduce suffering after flooding disasters,” said David Maurstad, senior executive of FEMA’s National Flood Insurance Program. “Equity in Action is the generational change we need to spur action now in the face of changing climate conditions, build individual and community resilience, and deliver on the Biden Administration’s priority of providing equitable programs for all.”

The change comes as people in vulnerable areas, often with less expensive homes, shy away from flood insurance despite increased risks. 

The National Flood Insurance Program provides about $1.3 trillion in coverage for more than 5 million policyholders in 22,500 communities across the nation. 

In developing the new rates, FEMA coordinated with subject matter experts from the U.S. Army Corps of Engineers, U.S. Geological Survey and the National Oceanic and Atmospheric Administration along with experts from across the insurance industry and actuarial science.

Currently, many policyholders with lower-value homes are paying more than they should and policyholders with higher-value homes are paying less than they should.

The agency now says it has the tools to address rating disparities by incorporating more flood risk variables. These include flood frequency, multiple flood types—river overflow, storm surge, coastal erosion, and heavy rainfall.

The cost to rebuild is key to an equitable distribution of premiums across all policyholders because it is based on the value of their home and the unique flood risk of their property. This has been an industry standard for years.

FEMA is conscious of the far-reaching economic impacts Covid-19 has had on the nation and existing policyholders and is taking a phased in approach to rolling out the new rates.

  • In Phase I: New policies beginning Oct. 1, 2021 will be subject to the new rating methodology. Also beginning Oct. 1, existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums.
  • In Phase II: All remaining policies renewing on or after April 1, 2022 will be subject to the new rating methodology.  

FEMA continues to engage with Congress, its industry partners, and state, local, tribal and territorial agencies to ensure a clear understanding of these changes.

For the latest information on Risk Rating 2.0, visit fema.gov.

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