First introduced in 2021, Risk Rating 2.0 is a new methodology created by the Federal Emergency Management Agency (FEMA) for determining flood insurance rates. Its goal is to provide fair and transparent flood insurance pricing that reflects an individual property’s potential flood risk. To do this, Risk Rating 2.0 takes a variety of factors into account, including the property’s elevation, proximity to bodies of water, and other relevant data to calculate an appropriate insurance premium.
As a recent article in Business Insider points out, this new system is far from perfect, and its pricing formula has room for improvements.
Since the rollout of Risk Rating 2.0, both Democrat and Republican lawmakers have voiced concern over its methodology and are calling for additional transparency and revisions to the pricing formulas. Secretary of Homeland Security Alejandro Mayorkas responded to these concerns in a congressional hearing this past April, noting that Risk Rating 2.0 needs more refining than initially anticipated. Mayorkas also noted that there may be the possibility of grants that will offer additional support to homeowners and businesses.
With a program of this scale, some adjustments are to be expected, Sean Buchtler, Jencap Insurance Services Assistant Vice President of Personal Lines explains. “Insurance is an ever-evolving industry. When [a new program] is put into production, there are a number of variables that become evident and need tweaking.”
According to Bill Fink, Jencap Insurance Services Senior Vice President, some property owners have responded to Risk Rating 2.0 by turning to private flood insurance. “Since the National Flood Insurance Program (NFIP) implemented Risk Rating 2.0, we [have seen] a significant increase in private flood business.” This has created opportunities for some insurance companies to create new and innovative tools to better serve their flood-risk customers. Fink notes, “One of our highly tech-savvy flood carriers allows the agent to rate and quote private flood while their customer is on the phone. It only takes minutes to quote, bind, and produce a policy.”
While some individuals are turning to private flood insurance, that’s not an option for everyone. Buchtler notes that the new pricing introduced by Risk Rating 2.0 has forced many who need flood insurance the most to go without. “A large number of consumers cannot budget for the pricing [increases] in some of these areas and have foregone coverage altogether,” says Buchtler. “This not only has an impact on the consumer but also on the National Flood Insurance Program itself. Consumers have weighed the risk of loss versus their overall budgetary constraints, and the latter is more of a day-to-day concern for many.”
Though Risk Rating 2.0’s aim is to provide fairer and more transparent pricing, the more flood-prone areas — which are often primarily populated by low-to-moderate income communities — have seen the greatest impacts. Louisiana, for instance, has had significant increases in flood insurance rates. Louisiana is projected to see an average rate increase of 135%, while the national average is closer to 104%.
Unfortunately, flood insurance is essential now more than ever. “Everyone should have flood coverage, as we’ve seen in the past five to ten years,” says Buchtler. “Floods are wide-ranging and happen in every part of the country. It’s important for customers to reach out to a flood expert to check all available options, either through the public or private market.”
Now that we’ve moved into the 2023 hurricane season, it’s critical for property owners to consider and prepare for any possible storms (and accompanying flooding) that will roll our way. Jencap specializes in the complexities of primary and excess flood insurance. Help your clients prepare for this hurricane season and reach out to a Jencap expert today.