How Risk Rating 2.0 Will Alter Flood Insurance for Real Estate Portfolios

the one minute takeaway

The Federal Emergency Management Administration (FEMA) has updated the risk methodology for flood insurance pricing in its Risk Rating 2.0 structure, altering the cost of coverage for many properties for the first time in a half a century. That could have a major impact upon real estate owners who thought their properties weren’t vulnerable.

Tapping into the latest flood hazard information on private sector data, catastrophe (CAT) modeling and evolving actuarial science, FEMA has rolled out a new pricing structure called Risk Rating 2.0, resetting flood insurance rates for the first time in decades.

Risk Rating 2.0 changes were rolled out for new National Flood Insurance Program (NFIP) flood policies on October 1, 2021, with changes for renewal policies taking effect on April 1, 2022.

The rationale for the change is to properly price risk, not basing prices on outdated flood zones and incomplete data.

As a result of the new pricing criteria, 23% of current policyholders will see immediate premium decreases, but 66% will experience an increase of up to $10 per month. Another 7% will see a monthly increase of $10 to $20, while 4% will incur a more than $20 monthly premium increase.¹

Under existing statutory limits on rate increases, rates will not increase more than 18% per year, and will increase each year.

More risk zones in Risk Rating 2.0

What makes Risk Rating 2.0 different? In addition to property characteristics such as elevation, the location of machinery and equipment, and the cost to rebuild, the new structure accounts for flood frequency, distance from a water source and the likelihood for multiple flood types such as river overflow, storm surge, coastal erosion and heavy rainfall.

With the new system, owners of numerous properties in “X Zones” — traditionally considered a low risk not needing flood insurance — may recognize a greater risk of flooding than they once considered.

Risk Rating 2.0 CAT modeling uses computer-assisted calculations to predict potential losses sustained from a catastrophic event like flooding. These calculations consider up-to-date variables, such as the construction of a new road or building, that affect the potential flow of floodwater.

As a result, modeling data and damages from hurricanes now have increased the need for flood cover in areas once considered safe. For instance, insured and uninsured losses from 2021’s Hurricane Ida are as much as $40 billion,² with a significant portion of damage occurring in X Zones.

Risk Rating 2.0’s fine print

It’s important to note that FEMA is not altering the flood zone with Risk Rating 2.0, even in cases where the new modeling paints a different picture of property risk. That means current FEMA modeling — not simply an NFIP zone — can help determine the appropriate level of flood coverage.

The flood zone may not paint an accurate picture of current risk, making it urgent for real estate owners and operators to consult with brokers about their actual risk and determine proper flood damage protection for their portfolio.

Contact HUB International’s real estate experts to help determine the right amount of flood coverage for your portfolio.

¹ FEMA, Risk Rating 2.0: Equity in Action, December 9, 2021.
² CoreLogic, “CoreLogic Estimates $27 Billion to $40 Billion in Insured and Uninsured Losses from Hurricane Ida Wind, Storm Surge and Inland Flooding,” September 1, 2021.