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What FEMAs Updated Flood Risk Rating System Means for Homeowners

The updated FEMA flood risk rating system directly impacts insurance premiums for many homeowners. See which homeowners it will impact.

October 4, 2021
October 4, 2021
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Homeowners living in flood plains -- especially along the coast -- may soon see a substantial change in their flood insurance premiums and property values.

On Friday, the Federal Emergency Management Agency (FEMA) rolled out the first phase of its updated flood risk rating system for the National Flood Insurance Program (NFIP).

The new system, known as Risk Rating 2.0, isn’t just a minor tweak. It’s the first major update to the NFIP’s risk analysis methodology since it was established in the 1960’s. Using 21st century data and metrics, Risk Rating 2.0 estimates the individual flooding risk of each home, instead of applying a blanket rating to entire floodplains like the old system.

The new system is more precise and equitable, representing a major leap in how flood risk is analyzed. However, it’s rollout will certainly impact the cost of owning or buying a home in high flood risk areas.

How Risk Rating 2.0 impacts homeowners

Risk Rating 2.0 completely changes how flood risk is analyzed and priced into NFIP insurance premiums.

Under the old system, every house in the same floodplain would pay the same flood insurance premium despite having drastically different risk factors. Homes directly on the waterfront -- which are often higher-value -- face much greater flood risk than homes several blocks inland, which are often lower-value.

This caused lower-value homes with less risk to essentially subsidize the flood insurance cost of higher-value homes with more risk.

Using new data and flood risk variables, Risk Rating 2.0 provides a unique flood risk assessment for each property. With unique ratings, each policyholder’s premium is based on the unique risk factors facing their property instead of a one-size-fits all premium for the entire floodplain.

Risk Rating 2.0 incorporates far more flood risk variables than the old system. These include:

  • Flood frequency
  • Flood types (river overflow, storm surge, coastal erosion and heavy rainfall)
  • Distance to water source
  • Property characteristics
  • Cost to rebuild

Properties with greater flood risk based on these factors may face steeper insurance premiums and, by extension, decreased property value. Those with less risk may see their premiums decrease and their home value increase as a result.

FEMA began Phase I of the Risk Rating 2.0 rollout on October 1, 2021. New NFIP policy premiums are now based on the updated methodology, and existing policyholders may be able to decrease their premiums based on their new risk rating.

In Phase II, Risk Rating 2.0 will apply to all policies renewing on or after April 1, 2022.

Related: These Four Words From the Fed Should Wake Up Homebuyers

Which homeowners are affected?

Risk Rating 2.0 applies only to property owners with flood insurance through the National Flood Insurance Program -- which is a majority of homeowners that have flood insurance.

NFIP covers more than 5 million policyholders across 22,500 communities. Combined, it provides nearly $1.3 trillion in coverage.

Flood insurance is required for most homeowners with mortgages in high-risk flood areas. While flood coverage doesn’t have to come from NFIP, the private flood insurers can be selective, and, unlike NFIP, are not required to cover homeowners in FEMA flood zones.

Only 15% of homeowners actually have flood coverage. According to Forbes, 43% of Americans believe they have flood coverage through their homeowners insurance, but homeowners insurance usually only covers flooding from burst pipes. Flooding from natural events is rarely included.

Flooding is becoming a prevalent risk to more areas of the country, making flood insurance something to consider for more homeowners and buyers. Changes in insurance premiums and home values due to FEMA’s Risk Rating 2.0 is something to keep an eye on.

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