National Flood Insurance Program (NFIP) & risk Rating 2.0

Flooding in Key West during Hurricane Wilma in 2005.

The National Flood Insurance Program is a federal program enacted in 1968 to provide affordable flood insurance to property owners who may be at risk for flooding. Flood risk is so great in coastal states that the private market is not willing to write policies that would be affordable to most property owners. NFIP is administered by FEMA, and contracts with private insurers to write and administer individual policies (they are not the providers of insurance coverage.)

With more policyholders in NFIP than any other State, Florida is the most impacted and greatest beneficiary of the NFIP. (1.7 million policies with $440 billion in total coverage.) 

With the highest percentage of properties insured with NFIP, Monroe County is one of the most impacted counties in Florida. (30,268 policyholders, with more than $7.5 billion in insured value.) 

With the vast majority of Monroe County property owners insured by NFIP, the cost of flood insurance is a significant component of our property values, housing costs, and cost of living. Its affordability is an important pocketbook issue for our constituents, as well as for our overall local, regional, and Statewide economies.

Coastal communities generate 80 percent of the State of Florida’s GDP and 46 percent of the entire national GDP. NFIP’s affordable flood insurance protection for homes and commercial properties is important because it is protective of the economic engines that coastal communities represent to the State of Florida and nationwide.

After Hurricanes Katrina and Sandy, the NFIP went into debt, having to pay out far more in claims than it was taking in through premium payments.  Flooding is an ongoing and ever more expensive disaster. The program is currently in $25B in debt (to the US Treasury.) 

As a result, calls are increasing for reforms to the program to eliminate this debt and require the program to operate in an actuarially sound way. Unfortunately, Congress and FEMA have targeted the need to increase premiums as the way to “fix” the program.

In 2014, Congress passed the Homeowners Flood Insurance Affordability Act requiring gradual insurance rate increase for NFIP-insured properties, with the goal of getting each property to a premium that reflects its “actuarial risk.” HFIAA requires annual increases of no less than 15 percent annually (but no more than 18 percent) for primary homes and 25 percent for all other properties.

There is a number of structural and programmatic changes, other than premium increases, that could be introduced that would save the program money and lower future payouts that would bring financial stability to the program, and Monroe County supports these as the alternative to simply raising premiums.

Monroe County continues to advocate for and support federal legislation such as the 2021 NFIP-RE Act and the 2019 SAFE Act, which will cap annual increases to under 10%, as well as other responsible reforms to keep the program financial stable while providing affordable coverage.

Risk Rating 2.0

Risk Rating 2.0 was implemented this year by FEMA at the direction of Congress to move NFIP in the direction of increasing premiums. 

It is a new methodology for rating the flood risk of individual properties. Historically, property risk was determined largely by the flood zone in which the property was located and the base flood elevation. 

Now, with Risk Rating 2.0, a number of other risk factors are incorporated into the risk calculation: 

• Proximity to water
• Type of construction
• Building elevation
• Propensity for excessive rainfall
• Frequency of flooding
• Cost to rebuild 
• Number of prior claims

As of April 1, 2022, Risk Rating 2.0 is in effect for all existing NFIP policyholders. Changes to premiums will take place upon the policyholder’s first renewal after this date.

What is changing:

• Premium amounts: Based on the risk factors for the new rating scheme, we can safely anticipate that most policyholders in coastal communities will see increases in their NFIP policy premiums.  Changes to premiums will take place upon the first renewal after April 1.
• New risk factors considered: Premiums are no longer based on the flood zone a property is located in. Instead, the new rating scheme looks at the specific characteristics of each individual property (property elevation, type of construction, proximity to water, flood frequency, cost to rebuild.)  
• Policies in non-flood zones: Those inexpensive Preferred Risk Policies for homes in X zones are being phased out. Homes in x zones will now be rated along the lines of all other properties, ie, according to their individual property characteristics. 

Things not changing: 

• Current caps on annual increases: The rate cap limit of 18 percent for primary homes and 25 percent for commercial props, second homes, and repetitive loss props will not change. Even if a property’s risk is calculated to be higher, the new premium cannot increase more than these caps each year. However, we continue to stress that these caps, which essentially double premiums within 4-5 years, are already too high and do not provide an affordable glide path.
• Sale of property: A property’s current flood insurance premium discounts can still transfer to new owners upon sale.
• Community Rating System: CRS discounts will continue to apply. In unincorporated Monroe County flood policyholders now receive a significant discount of 35 percent on their annual premiums. The CRS discount is automatically applied and is indicated on your individual policy. The Class 3 discount will take place upon renewal after April 1, 2022. If you don’t see the CRS class and discount on your policy, contact your insurance agent. 
• Flood zones (such as A, AE, X):  The flood zone in which your property is located will no longer apply for the purposes of determining premium amounts. Flood zones will continue to be used for the purposes of determining the borders of SFHAs and in determining mandatory purchases. 

Constituents are encouraged to:

• Contact your insurance agents to get your new premium amounts under Risk Rating 2.0. You do not have to wait until your renewals to know.  
• Get elevation certificates. These will ensure that accurate elevation data is being used to calculate your premiums. FIRM is reporting that most policyholders are getting better rates with elevation certificates.
• Support County efforts to continue to raise our CRS class. Each improvement in the County’s CRS class results in a higher discount for your individual policy premiums. 
• Express concerns about your premiums or premiums increases, or the need to keep flood insurance affordable, please contact your federal elected officials. NFIP is a federal program. It would be helpful for them to hear from you about how impactful the increases are, and how important affordable flood insurance is to our pocketbooks and local economy.  Florida is the single biggest stakeholder in NFIP. Urge your Senators and Congressperson to support legislation that keeps premiums in the National Flood Insurance Program affordable.  One way to do this is to ask them to support legislation that places “guard rails” on Risk Rating 2.0, by capping annual allowable increases at 9%.

Additional Information

• NOAA's National Coastal Population Report: 1970 to 2020
  
• Economic Value of Resilient Coastal Communities
• The Business of Disaster: PBS Investigates the Excessive Commissions Charged to NFIP by Write Your Own Companies 
• FEMA Overpays Private Insurers for Handling Flood Insurance