Understanding FEMA’s Risk Rating 2.0 system for flood insurance
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The Federal Emergency Management Agency (FEMA) created Risk Rating 2.0 to help more fairly rate flood insurance policies by taking more rating factors into consideration. The FEMA Risk Rating 2.0 program started in October 2021 for new policies, and existing policies began rolling into the new system as of April 2022. Understanding this rating system might help you understand your flood insurance rates and determine whether flood insurance through the National Flood Insurance Program (NFIP) or a private insurer is better for your home. Bankrate explains how FEMA Risk Rating 2.0 works and what impact it has had on policyholders.
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Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed. Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
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- Risk Rating 2.0 was built to achieve greater equity through improved accuracy.
- FEMA Risk Rating 2.0 rates were not expected to dramatically change for most current policyholders.
- From 1996 to 2019, 99 percent of U.S. counties experienced at least one flooding event.
What is FEMA Risk Rating 2.0?
FEMA’s Risk Rating 2.0 is a new rating system for NFIP flood insurance policies. The program rolled out in two phases. Phase one began October 1, 2021 and entailed new policies being subject to the new rating methodology. Additionally, existing policyholders who were up for renewal could begin benefiting from immediate decreases in their flood insurance premiums. Phase two started on April 1, 2022 and applied the new rating system to all existing policies as they renewed.
FEMA had previously been using an outdated model for determining flood insurance costs. Modern science, years of data and the inclusion of third-party software, data sets and models have allowed FEMA to create a far more accurate system for determining flood risks and the associated costs. Risk Rating 2.0 is a new approach that takes into account numerous variables, such as individual home value and flood risk, that were not factored previously.
The average annual cost of flood insurance from the NFIP was $700 per year, but that will likely change under the new system. Risk Rating 2.0 considers a host of variables that weren’t included in the previous NFIP model. According to FEMA, these factors are flood frequency, flood types, proximity to potential flood sources and property characteristics. There is a particular focus on the cost to rebuild the property within the new system. This variable forms a crucial part of the backbone of why FEMA has branded this new system as “Equity in Action.”
Before incorporating rebuilding cost, flood insurance prices didn’t differentiate between structures based on unique financial risk. As a result, expensive homes were charged less than their share, while less expensive homes were charged more. The idea behind Risk Rating 2.0 is that the more a home costs to rebuild, the more costly that policy should be. That is because a more expensive rebuild leads to a higher-cost insurance claim.
Why FEMA updated flood insurance rates
FEMA’s goal with Risk Rating 2.0 was to improve the equity of the NFIP by using more actuarially-based rates. FEMA Risk Rating 2.0 uses more efficient and accurate models which are designed to better capture the financial risk of flooding for different homes. Part of the problem with the older system, as identified by FEMA, was that it could charge two properties the same rate even if one would cost significantly more to rebuild.
Prior to Risk Rating 2.0, the NFIP hadn’t had a serious update on its pricing model since the 1970s. In that time, the insurance industry’s modeling systems and datasets have grown and changed significantly. Additionally, the scientific understanding of floods, the associated risks, and damages and changing weather systems behind flood events have also continually developed. With Risk Rating 2.0, FEMA is attempting to bring the NFIP up to date with modern approaches, many of which are already insurance industry norms.
Flood insurance rate increases and decreases by state
The new Risk Rating 2.0 system was predicted to cause minor rate changes for most policyholders, but some areas did see larger predicted changes. Prior to the implementation of the system, FEMA released state-by-state estimates for NFIP rate increase in 2021. Over 85 percent of NFIP flood policies in Alaska, for example, were predicted to see a rate decrease with the new system. However, in Texas, only about 14 percent of policyholders were estimated to have a rate decrease, with most policies seeing an increase up to $120 per year. While Risk Rating 2.0 is designed to be a more fair rating system, rates will still depend on a home’s individual flood risk. The higher your risk, the more you’re likely to pay.
Even within a state, there is often significant variance between locations. With the new system, more variables go into each rate calculation than before. In some cases, flood prevention steps may be taken to help mitigate the risk of flood damage and potentially reduce rates.
Percent of policyholders facing average rate increases and decreases
Nationwide, most NFIP policyholders — about 66 percent — were predicted to face a rate increase of $0 to $10 per month, or up to $120 per year. Roughly 23 percent of current policyholders were expected to see a rate decrease averaging $86 per month, or $1,032 per year. Only 7 percent of current NFIP policies were expected to see an increase of between $120 and $240 per year, and only 4 percent were predicted to pay more than $240 more per year.
In the table below, the NFIP’s estimated policyholder rate changes are broken into three categories: rate decreases, rate increases of up to $240 per year, and rate increases of $240 or more per month. For the most part, those who will pay $240 more or higher amounts per year are the smallest group of affected policyholders. Remember that many policyholders have already been rolled into the new system, but not all policies will be included in Risk Rating 2.0 until April 2023.
Flood insurance rate increase 2021:
| State | Total rate decreases | Rate increases of up to $240 per year | Rate increases of $240 or more per year |
|---|---|---|---|
| Alabama | 21% | 76% | 3% |
| Alaska | 86% | 13% | 1% |
| Arizona | 25% | 73% | 2% |
| Arkansas | 33% | 63% | 4% |
| California | 27% | 69% | 4% |
| Colorado | 43% | 53% | 4% |
| Connecticut | 37% | 54% | 9% |
| Delaware | 38% | 60% | 2% |
| Florida | 20% | 76% | 4% |
| Georgia | 24% | 74% | 2% |
| Hawaii | 13% | 83% | 4% |
| Idaho | 28% | 69% | 3% |
| Illinois | 42% | 54% | 4% |
| Indiana | 46% | 51% | 3% |
| Iowa | 37% | 57% | 6% |
| Kansas | 38% | 59% | 3% |
| Kentucky | 29% | 65% | 6% |
| Louisiana | 20% | 77% | 3% |
| Maine | 34% | 57% | 9% |
| Maryland | 61% | 38% | 1% |
| Massachusetts | 39% | 55% | 6% |
| Michigan | 54% | 45% | 1% |
| Minnesota | 29% | 68% | 3% |
| Mississippi | 16% | 80% | 4% |
| Missouri | 30% | 63% | 7% |
| Montana | 37% | 61% | 2% |
| Nebraska | 43% | 50% | 7% |
| Nevada | 21% | 76% | 3% |
| New Hampshire | 35% | 58% | 7% |
| New Jersey | 21% | 74% | 5% |
| New Mexico | 36% | 62% | 2% |
| New York | 32% | 61% | 7% |
| North Carolina | 26% | 71% | 3% |
| North Dakota | 38% | 61% | 1% |
| Ohio | 45% | 51% | 4% |
| Oklahoma | 30% | 66% | 4% |
| Oregon | 30% | 66% | 4% |
| Pennsylvania | 30% | 63% | 7% |
| Rhode Island | 46% | 51% | 3% |
| South Carolina | 26% | 71% | 3% |
| South Dakota | 31% | 65% | 4% |
| Tennessee | 28% | 67% | 5% |
| Texas | 14% | 83% | 3% |
| Utah | 53% | 46% | 1% |
| Vermont | 33% | 59% | 8% |
| Virginia | 45% | 53% | 2% |
| Washington | 33% | 63% | 4% |
| Washington, D.C. | 73% | 26% | 1% |
| West Virginia | 17% | 75% | 8% |
| Wisconsin | 44% | 54% | 2% |
| Wyoming | 33% | 64% | 3% |
Why FEMA rate changes matter
FEMA Risk Rating 2.0 will affect each policyholder differently. Some NFIP policyholders will see no change or might even pay less each year. For others, flood insurance rates will increase. If you’re in the market for a home, understanding FEMA’s new rating system can help you make a more informed decision about location or the homeowners insurance company and coverage you may need. Some homeowners may choose to pursue private flood insurance if their new rates aren’t sufficiently competitive.
Frequently asked questions
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The Risk Rating 2.0 system is the first major overhaul of NFIP rates since the 1970s. The new rating algorithm takes more factors into account and is designed to present more fairly-priced flood rates.
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They might. Most policyholders will see a small increase, up to $120 each year, but some will see increases of $240 per year or more. However, the NFIP does note that there is a statutory limit on most rate increases, and that they won’t increase more than 18 percent per year.
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You might. Nearly all U.S. counties experienced a flood event between 1996 and 2019, according to FEMA. It’s clear that flooding doesn’t just happen in coastal areas, although those areas may be more vulnerable to flooding than inland counties. Even if your home is inland, though, you may want to talk to an insurance agent about your flood risk and consider buying a flood insurance policy.
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