What You Should Know About FEMA’s Risk Rating 2.0

©Sollina Images - Getty Images

Nearly a decade of work to revamp the National Flood Insurance Program is upon us, and a lot of misinformation is being spread around. As the 2021 chair of NAR’s Insurance Committee, I would like to set the record straight and am pleased to report that on Oct. 1, FEMA began implementing a new flood insurance pricing methodology called Risk Rating 2.0: Equity in Action. REALTORS® have been calling for these changes since Congress passed the Biggert-Waters Flood Insurance Reform Act in 2012. FEMA heard your concerns and those of your clients and adopted most of the recommendations from NAR’s Insurance Committee.

These changes took effect Oct. 1 for new policies but will not take effect for renewal of existing policies until April 1, 2022. It is already clear that Risk Rating 2.0 will produce more accurate and equitable NFIP rates that better reflect the specific flood risk of each individual home.

What to Know About Risk Rating 2.0

1. FEMA is replacing an inaccurate rating system that has not been updated in half a century and is not sustainable for homeowners or taxpayers. Imagine if you had to serve your clients based on 50-year-old technologies and only two pieces of information about a property—in this case, flood zone and base elevation certificate. If FEMA did not make these changes, NFIP rates would continue to climb 18% to 25% per year until reaching the current top rate of $63,000 for a $250,000 home under many policies.
2. Risk Rating 2.0 will now price each home individually—rather than by zone—using modern industry technologies, more flood risk variables, and property-specific characteristics including elevation, distance to water, and cost to rebuild. One million homeowners will see a significant rate decrease at renewal while the majority of other homeowners will pay a slight increase or decrease. The new top rate in the program is $12,000 per year compared to $63,000 under the old system. Low-value properties also will no longer subsidize high-value properties, and elevation certificates are not required for an accurate rating.
3. Because each property is now rated individually, only a licensed insurance agent will be able to tell your client whether their rate will increase or decrease under the new system. While flood insurance is outside real estate licensure and training, you can be a resource to your clients by identifying qualified insurance and flood risk professionals who can help answer their questions.

What Isn’t Changing Under Risk Rating 2.0

1. Risk Rating 2.0 applies only to risk-based NFIP rates and will not affect flood mapping or insurance requirements, which will continue to be enforced by Congress, local communities and lenders.
2. Grandfathered rates, including for newly mapped or pre-Flood Insurance Rate Map (FIRM) subsidized properties, will continue. By law, increases will not be more than 18% per year.
3. Policyholders will still be able to transfer their grandfathered rates and other discounts to a buyer/new owner by assigning their flood insurance policy at the time of the sale of the property.

After the Biggert-Waters Act was enacted, NAR formed a member insurance committee to investigate the sudden, excessive flood insurance rate hikes and guide REALTORS® in the aftermath. We successfully convinced Congress to delay the rates for a decade while we hired independent actuaries and worked with FEMA to help diagnose the problem and propose solutions. 

Risk Rating 2.0 is the culmination of thousands of member hours and research dollars as REALTORS® collaborated with and worked alongside FEMA to develop the new methodology. This outcome is not only a big win for consumers but also a powerful example of your RPAC dollars at work.