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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Key takeaways

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FEMA had previously been using an outdated model for determining flood insurance costs.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.

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