Pew Applauds Updates to Federal Flood Insurance Program

Risk Rating 2.0 will make insurance premium rates fairer and more reflective of actual risk

Updates to Federal Flood Insurance Program

WASHINGTON—The Pew Charitable Trusts applauds the Federal Emergency Management Agency (FEMA) for taking an important step today toward improving the National Flood Insurance Program’s rate setting. Risk Rating 2.0, as FEMA’s new rating methodology is called, will make flood insurance rates fairer, more transparent, and far more closely aligned with actual risk. The rating approach will apply to new flood insurance policies written later this year and become effective for existing policies renewed beginning next year.

Forbes Tompkins, a manager with The Pew Charitable Trusts’ flood-prepared communities project, issued this statement:

“FEMA’s unveiling of Risk Rating 2.0 is long overdue. It replaces outdated and oversimplified assumptions about risk and costs and instead creates a new, far more precise approach for FEMA to match rates to risks. This new flood insurance risk rating methodology will help the nation become better prepared for storms and floods.

“As an analysis by FEMA actuaries has revealed, the current system’s rate structure frequently overprices insurance on older or modestly priced homes. This has led to an inequitable practice in which owners of old or more affordable homes pay too much while owners of new or pricier homes pay too little. This inequity is eliminated with Risk Rating 2.0.

“Another flaw in the current rating system is that it creates confusing and conflicting insurance rates for different properties that are in the same neighborhoods and are subject to similar risks. The timing of a community’s entry into the National Flood Insurance Program, the date that a flood map is updated, the date of construction of a building, or the date on which insurance is first purchased can be key factors in these rate differences, sometimes leading to the raising or lowering of rates based on the timing of various transactions more than on actual risk.

“The new system addresses this confusion. And, in accordance with the basic actuarial principles that a regulated private insurer would have to follow, it is even-handed in its treatment of properties with similar risk and cost characteristics.

“Another benefit of the new rating system is its potential to provide an incentive for policyholders to be better prepared for potential flooding. Under the current system, which looks at a limited range of factors related to flood risk, certain modest or interim steps that a homeowner might take, such as raising utilities off the ground floor or equipping the home with flood vents, would be unlikely to lower the homeowner’s insurance costs substantially, if at all. But the new system, which is built on a more detailed evaluation of risk, could lead to savings for policyholders and communities that take practical mitigation actions.

“The Pew Charitable Trusts sees today’s announcement from FEMA as critical to making flood insurance fairer and more attractive to additional property owners. This first step toward risk-based rates will also put the National Flood Insurance Program on a path to fiscal sustainability.”