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 create more fairly rated flood insurance policies by taking more rating factors into consideration. For new policies, the FEMA Risk Rating 2.0 program started in October 2021. Existing policies began rolling into the new system as of April 2022 and as of April 2023, the plan is now fully implemented. 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.
Key takeaways
- 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. Phase two completed on April 1, 2023.
FEMA had previously been using an outdated model for determining flood insurance costs.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 under the new system policyholders pay on average $888. 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 changes 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 than predicted changes. 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. Risk Rating 2.0 has also factored in the risk of different types of flood exposures that may cause damage to residences. Of the 2,192,730 single family policies issued, here is the percentage breakdown between the five main exposure risks:
- Inland flood: 100 percent
- Storm surge: 60.7 percent
- Tsunami: 1.0 percent
- Great Lakes: 0.2 percent
- Coastal erosion: 7.4 percent
Will my rates increase with Risk Rating 2.0?
While many NFIP policyholders saw a rate increase, the ultimate goal is to have policyholders pay the appropriate rate for their policies. By law, NFIP policies for primary residences have a rating increase cap of 18 percent per year. FEMA states that policyholders are on a ‘glide path’ to have their current cost of insurance eventually match the calculated risk-based cost of insurance.
FEMA terms policyholders need to know
| Risk-based cost of insurance | This is the full actuarial rate calculated by FEMA under the new risk plan based on expected losses. Due to state subsidies, most policyholders pay below this amount. |
| Current cost of insurance | This is the premium that policyholders currently pay. Since the rate can not increase by more than 18 percent a year, premiums will increase until it matches the risk-based cost of insurance. |
| PIF | This stands for policies-in-force, meaning the current amount of active insurance policies held by any particular insurance provider. In this case, the amount of active NFIP policies. |
| Average RCV | The average replacement cost value to rebuild a home after a total loss. This estimate accounts for the cost of parts, labor, location and square footage. |
Below is a chart showcasing the per-state current cost of insurance vs. the risk-based cost of insurance. According to NFIP, once policyholders’ current costs match the risk-based costs, their policy should not increase again until the risk-based cost is recalculated.
Summary of single family homes under Risk Rating 2.0 as of September 30, 2022:
| State | Number of policies in force (PIF) | Average risk-based cost of insurance | Average current cost of insurance | Average replacement cost value (RCV) |
|---|---|---|---|---|
| Nationally | 2,192,730 | $1,808 | $888 | $543,017 |
| Alabama | 19,745 | $2,051 | $927 | $457,660 |
| Alaska | 1,230 | $543 | $454 | $543,419 |
| Arizona | 13,059 | $1,443 | $825 | $489,192 |
| Arkansas | 6,335 | $1,583 | $849 | $356,538 |
| California | 89,572 | $1,689 | $901 | $651,665 |
| Colorado | 7,910 | $1,644 | $860 | $630,302 |
| Connecticut | 13,291 | $3,000 | $1,590 | $785,257 |
| Delaware | 10,903 | $1,497 | $874 | $666,406 |
| Florida | 597,967 | $2,213 | $958 | $519,678 |
| Georgia | 43,324 | $1,332 | $791 | $513,222 |
| Hawaii | 6,489 | $3,653 | $1,437 | $681,682 |
| Idaho | 2,673 | $1,633 | $862 | $575,493 |
| Illinois | 15,698 | $1,697 | $1,039 | $550,698 |
| Indiana | 9,793 | $1,361 | $917 | $434,676 |
| Iowa | 4,804 | $1,679 | $867 | $363,232 |
| Kansas | 4,084 | $1,569 | $870 | $413,218 |
| Kentucky | 9,231 | $1,569 | $870 | $389,187 |
| Louisiana | 284,095 | $1,904 | $813 | $515,620 |
| Maine | 3,565 | $2,700 | $953 | $583,020 |
| Maryland | 21,928 | $742 | $608 | $584,316 |
| Massachusetts | 20,348 | $2,097 | $1,269 | $721,801 |
| Michigan | 11,037 | $1,068 | $811 | $455,227 |
| Minnesota | 3,914 | $1,832 | $943 | $567,157 |
| Mississippi | 31,682 | $2,137 | $858 | $452,248 |
| Missouri | 7,743 | $2,038 | $978 | $469,098 |
| Montana | 2,170 | $1,656 | $899 | $456,860 |
| Nebraska | 4,089 | $1,323 | $824 | $387,325 |
| Nevada | 4,873 | $1,031 | $715 | $500,128 |
| New Hampshire | 2,479 | $2,545 | $1,216 | $523,352 |
| New Jersey | 27,478 | $2,129 | $1,081 | $677,595 |
| New Mexico | 6,026 | $1,344 | $891 | $387,276 |
| New York | 72,874 | $2,197 | $1,184 | $865,963 |
| North Carolina | 73,444 | $1,363 | $791 | $468,062 |
| North Dakota | 3,535 | $1,342 | $798 | $532,104 |
| Ohio | 12,976 | $1,303 | $883 | $418,251 |
| Oklahoma | 5,848 | $1,683 | $876 | $403,990 |
| Oregon | 10,285 | $1,969 | $936 | $463,414 |
| Pennsylvania | 21,928 | $2,060 | $1,075 | $516,345 |
| Rhode Island | 5,300 | $1,503 | $1,062 | $659,355 |
| South Carolina | 88,499 | $1,531 | $798 | $572,111 |
| South Dakota | 1,483 | $2,062 | $937 | $517,151 |
| Tennessee | 13,388 | $1,664 | $887 | $479,330 |
| Texas | 463,163 | $1,405 | $776 | $524,545 |
| Utah | 1,963 | $953 | $645 | $644,148 |
| Vermont | 1,334 | $2,248 | $1,197 | $515,615 |
| Virginia | 54,165 | $1,077 | $743 | $540,494 |
| Washington | 14,923 | $1,782 | $918 | $511,725 |
| Washington, D.C. | 906 | $407 | $404 | $581,643 |
| West Virginia | 5,293 | $3,074 | $1,133 | $431,071 |
| Wisconsin | 5,961 | $1,331 | $878 | $506,057 |
| Wyoming | 904 | $1,669 | $907 | $641,707 |
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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The national average premium for flood insurance is $888. However, this amount may vary drastically depending on several factors, such as where you live, your home’s square footage and exposure risk. The risk-based cost of insurance for your home may be a more accurate estimate of your flood insurance cost through the NFIP. As a point of comparison, the national risk-based premium is $1,808.
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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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