FEMA’s New Flood Insurance Policy Is Fairer, Mitigates Rewards

For decades, federally backed flood insurance rates have been calculated using an outdated system, based on an ancient understanding of flood risk. This means that some policyholders covered by the National Flood Insurance Program (NFIP) whose properties have a lower flood risk have paid too much while others with a higher flood risk have not. paid enough.

Now it looks like the government is on the verge of correcting this imbalance: Earlier this year, the Federal Emergency Management Agency (FEMA) announced its updated risk rating structure that will require homeowners to pay for the coverage on the basis of a more refined examination of their structure. flood risk and repair cost.

As part of this more modern approach, which FEMA calls Risk Rating 2.0: Equity in Action, the agency will use industry flood data, best practices and catastrophic modeling to set pricing. As of October 1 for new policyholders and April 2022 for existing policyholders, the new program also encourages flood mitigation by offering lower premiums in exchange for risk reduction actions, such as increased claims. public services.

In a world of increasing risk, this is a welcome and timely change. Without the 2.0 risk rating, every NFIP insured would get a rate increase this year. Under the new, fairer plan, nearly 1.2 million of the more than 5 million NFIP policyholders will see their premiums drop immediately. More than 215,000 policyholders will benefit from a reduction of at least $ 1,000 on their annual premium. Among the owners of single-family homes who will see their costs increase, almost 88% will face a modest increase of $ 10 or less per month.

A redesign was overdue

Since 1968, when it was established, the NFIP has played an important role in reducing the impact of flooding and supporting the recovery of thousands of flood-prone communities across the country. But until this year, the NFIP scoring approach had not changed substantially for over 40 years. Over the decades, the NFIP has adjusted rates every year, much like auto insurance companies price their premiums.

The 2.0 risk rating recognizes, for the first time, the complex range of factors that influence flood risk and addresses the inherent bias of the old system against many older, lower-cost homes. In addition to making political pricing fairer and more equitable, the new program has the potential to help people better understand their flood risk and what can be done about it.

Understanding the Benefits of Risk Score 2.0

A fairer system

The old pricing system required all policyholders to obtain a certain basic level of coverage; homeowners who needed more coverage could purchase it, often at significantly reduced rates from the base. This approach essentially created a bias against lower value homes, whose owners often ended up paying a higher overall rate than owners of more expensive properties enjoy.

In addition, the old system relied on outdated national averages to calculate the expected cost of damage. These averages, which are used to calculate premiums, favored owners of high value properties because, in essence, one insured would pay the same rate to fully insure a fine crystal vase that another would pay to fully cover a good imitation glass. Marlet. Instead, the new system uses replacement cost values ​​that reflect regional and regional differences, so the price of coverage is proportional to the actual cost it would take to replace or repair the property. These changes make the system fairer overall and help prevent people in low-cost neighborhoods from overpaying for flood insurance.

Better understanding of flood risks, data

It’s also important to note that the new system is moving away from the price base primarily on a handful of widely drawn and often dated flood map areas. Instead, the system uses the power of data collection and modeling to analyze a more detailed set of factors affecting flood risk, including the proximity and size of a water source, the frequency and type of flooding (such as heavy rains or coastal erosion), soil and building elevation, types of foundations and drainage issues. The more detailed analysis allows prices to be established on a sliding scale, such as setting different rates based on risk for a house by the river and one on top of a nearby hill, rather than bundling these two houses at the same rate simply because they are in the same mapped area. Under the 2.0 risk rating, policyholders can now save money for practical mitigation activities, such as raising mechanical and electrical equipment above flood levels or installing openings in the floodplain. ‘flood.

Floods are the costliest natural disaster in the United States – it has cost more than $ 900 billion in damage and economic loss since 2000 – and affects every state. The recent disasters in Louisiana, Mississippi, and northeastern Hurricane Ida, and before that in Tennessee, North Carolina, New York and New Jersey, are just the latest evidence the nation remains. largely ill-prepared for increasingly severe storms and floods. threats.

The 2.0 risk rating will be an important tool in educating homeowners, community leaders and decision makers about the dynamic and growing risk of flooding, from coastal storm surges and overflowing rivers to overloaded and undersized drainage systems. It offers a truer and fairer assessment of flood risk that will focus on the neighborhoods and communities in each state most at risk while providing relief to those who have been paying too much unfairly for years.

Laura Lightbody leads The Pew Charitable Trusts Flood Prepared Communities Project.

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Justin D. O'Neill

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