What Is FEMA Flood Insurance Risk Rating 2.0?

An increase in natural disasters has made flooding a major concern in the U.S., and the federal flood program that handles national flood insurance is feeling the brunt of both flooding incidents and their associated costs.

Since it was created by Congress in 1968, the National Flood Insurance Program (NFIP), which is a part of the Federal Emergency Management Agency (FEMA), has lost more than $36 million, at least in part because it undercharges for premiums. Now, FEMA plans to overhaul its fee structure with a new plan scheduled to go into effect on October 1, 2021.

We’ll look at the current flood insurance model, examine how and why it’s changing, and explain how the new risk rating may affect homeowners.

What Is FEMA Flood Insurance?

Through the NFIP, FEMA provides more than five million flood insurance policies in the U.S. It’s primarily designed to serve those in flood-prone areas, adopt floodplain standards that reduce flood risk, and eventually reduce the amount that the federal government spends on flood disaster assistance.  

But here’s the problem: While the program collects $4.6 billion annually in premiums, fees, and surcharges from policyholders, it provides coverage to the tune of $1.3 trillion. So, while the NFIP serves others who are literally underwater, it is, itself, figuratively underwater.

The First Street Foundation, a nonprofit research and technology group based in Brooklyn, NY, projects that flooding will result in $20 billion in damage in 2021. But by 2051, the amount will balloon to $32.2 billion. This growth rate is attributed to climate change.

What Is FEMA Flood Insurance Risk Rating 2.0?

In an attempt to create a more sustainable flood insurance program, FEMA has created Flood Insurance Risk Rating 2.0, which went into effect in October, 2021. Rates for new policies starting on or after that date were determined by the new rating method. Those with policies scheduled to renew on or after April 1, 2022, saw the changes reflected when they renew.

What’s Different? 

The old rates were based on static data, such as the policy owner’s elevation within a zone on a FEMA Flood Insurance Rate Map. However, Risk Rating 2.0 is based on more advanced tools and capabilities that better reflect a property’s individual flood risk.

“It would take a risk-based approach to pricing insurance premiums, using an algorithmic model similar to the one we employed in our Cost of Climate national report,” Dr. Jeremy Porter, head of research and development at the First Street Foundation, told The Balance by email. “This risk-based approach would allow the NFIP to use best actuarial practices in pricing risk, aligning costs to actual flood risk, and ensuring that premiums within the NFIP are commensurate with risk.”

FEMA Flood Insurance Risk Rating 2.0 was actually introduced in 2019 but encountered some roadblocks. Some people argued that since it is a subsidized program, NFIP premiums should not keep up with costs. One high-profile opponent was Senate  Majority Leader Chuck Schumer of New York. When the plan was first announced in 2019, he pushed back on the idea of raising premiums for homeowners in his state, noting that it could severely impact some communities.

Why Change Flood Insurance Pricing?

FEMA’s plan to change flood insurance pricing was based on the fact that flood insurance premiums weren't keeping up with costs.

Porter said that due to the growing severity of storms, exacerbated by a changing climate, “there have simply been more claims than the National Flood Insurance Program is designed to handle.” But while the climate has changed, the NFIP method of assessing risks and price premiums was still based on financial and scientific climate data dating back to the 1970s. “As a result of this zone-based approach, the program hasn't collected sufficient premiums to cover the true extent of the risk over the past several decades,” Porter said.

But with Risk Rating 2.0, FEMA can address such variables as flood type (heavy rainfall, coastal erosion, river overflow, etc.), distance to a water source, and flood frequency.

How Will It Affect Me?

According to FEMA, some policyholders are paying more than their fair share while others (those with higher-valued homes) are paying less than they should. The goal is to ensure that premiums are fair, based on the home’s flood risk.

However, some people could be surprised to learn that they will now need to purchase flood insurance as well. “Our studies suggest that a great deal of flood risk exists outside of SFHA's, which has had further deleterious effects on the NFIP's ability to keep up with claims, because homes outside the SFHA are not required to carry flood insurance, and those that do receive a steeply discounted price under the current system,” Porter said.

He applauded the rollout of Risk Rating 2.0, and said it would align risk and price across the board. “And this would lead to better financial solvency for the program,” Porter said.

FEMA projected that 23% of policyholders will actually experience a premium decrease, and 66% will see an increase of up to $10 per month. Also, 7% of current policyholders will experience a $10 to $20 per month increase, and only 4% will see a monthly increase over $20.

The Bottom Line

FEMA’s Risk Rating 2.0, which went into effect on October 1, 2021, changed how the NFIP rates flood risks and prices policies. FEMA had been using data from the 1970s, but incorporating more modern tools allows it to provide more accurate flood risk estimates. The new rating is likely to increase premiums for those with higher-priced homes while reducing premiums for some people at the other end of the spectrum.