Visit FIRM’s Risk Rating 2.0 landing page to learn more.

Since implementing Risk Rating 2.0 in October 2021, FEMA has been slow to release any kind of education or guidance to property owners, insurance agents, bankers, and even Members of Congress as to how their methodology is rating properties to determine premiums. The model algorithms are proprietary, like the hurricane models used in determining windstorm rates, but FEMA claims that the new system is more equitable  and relies on “internal data sets” particular to a property.

This month FEMA released a Rate Explanation Guide and a Discount Explanation Guide.  While both documents shed some light on the methodology, still a lot of questions are unanswered.

Risk Rating 2.0:  Equity in Action, as FEMA is calling it, considers specific characteristics of a building “to provide a more modern, individualized, and equitable flood insurance rate.” Features like proximity to water, ground elevation, and construction are all factored into the rating to determine premium costs.  However, still unknown is the weight of these characteristics.  For example, which lowers or raises the premium more–proximity to water or height of the first floor?  The Rate Explanation Guide does a good job of listing the determining factors, but it doesn’t offer much guidance that would help homeowners to determine what mitigation efforts would be most beneficial in lowering their premium.

Likewise, the Discount Explanation Guide explains which features may lower premiums, but the discounts listed do not refer to premium discounts but rather to a discount in the rating variable.  Again, without knowing the weight of the variables, knowing the discount doesn’t offer much insight.

According to the American Society of Floodplain Managers, the correlation between risk reduction and insurance cost-savings is very difficult to identify.

  • With the removal of rating tables and no online estimator, floodplain administrators no longer have a means to help the property owners understand the financial benefits of mitigating.
  • Policyholders who have elevated their homes to get lower premiums are now seeing significant increases based on the projected full-risk premium.

The application of the Community Rating System discount appears to be inequitable also.  As of April 1, 2022, properties in unincorporated Monroe County are eligible for a 35%. The other municipalities have earned discounts from 15-25%.  This reflects the hard work of local governments and members of the communities to strive for stronger mitigation and protection.  However, it is unclear if all properties will be eligible for these discounts.  Current X zone policies on a glidepath to full-risk rate won’t benefit from the CRS discount until reaching the full-risk rate. If a community’s class retrogrades–a portion of the discount is lost for some reason–the reduced discount is applied immediately.  If a community’s class increases, the improved discount isn’t applied to policies until the end of the glidepath premium NOT the renewal.

Currently the maximum increase in premium is 18% for residential policies and 25% on others.  So how can a homeowner know what their full-risk rate will eventually be? That amount is listed on the declaration page once the policy is written. But with so many factors such as change in value, CRS changes, and  loss or addition of mitigation features over time, that number is unreliable and leaves policyholders in the dark.

FEMA was initially set to roll out RR 2.0 in 2019 but postponed the implementation because the system was not ready.  A rating methodology that leaves so many unanswered questions, not just for policyholders but for those in the insurance, banking, construction, floodplain management, and real estate industries is still not ready.

 

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