As we experience more extreme weather, and floods increase across the country, the National Flood Insurance Program (NFIP) is poised to make a shift in how it prices its policies that is expected to have a drastic effect on premiums for many homeowners.
The NFIP's new premium-setting system, called Risk Rating 2.0, will change how the government-run insurer calculates premium rates to better reflect the risk of each individual household.
The new regimen, set to take effect in October 2021, comes as new research has concluded that the model that the Federal Emergency Management Agency uses to map flood risk across the country greatly underestimates the risk.
That means that many homes in flood areas may be at increased exposure than previously thought, and that the insurance premiums many property owners are charged are not enough to account for the steadily increasing flood risk due to increasingly volatile weather.
As a result, hundreds of thousands of homeowners could see their flood insurance rates jump this fall, according to a study by First Street Foundation, which models flood risk. In the many high-risk areas of the country, rates could skyrocket, with rates for properties in those areas needing to increase more than $10,000 a year to account for the true risk they face.
Along with these expected rate increases, the study also found that hundreds of thousands of homes are likely going uninsured because they are not accounted for in FEMA's Special Flood Hazard Areas (SFHA), which are areas that have at least a 1% chance of being flooded in any given year.
FEMA creates these maps so that homeowners know what they are getting into when they buy a new property. Also, under federal law, homeowners that have a federally backed mortgage and reside within an SFHA must secure flood insurance.
Uninsured for flood damage
As stated above, many people live in areas that are not in an SFHA but still have a 1% chance or more of flooding. But since they are not in an official SFHA, they likely have not taken out flood insurance, meaning that they would have to pay for repairs and replacement costs out of pocket if a flood hit their property.
Homeowner's insurance typically does not cover flooding.
Areas with the biggest risk underestimates include Florida, New Jersey and South Carolina, as well as parts of Texas, Washington and California.
"Because a great deal of flood risks exists outside of FEMA's designated Special Flood Hazard Areas, this research reveals a vastly expanded mapping of economic risk associated with the potential for flooding and demonstrates the serious underestimation of financial and personal risk to property owners," the report states.
The First Street report predicts that flood risk will grow in currently flood-prone areas, as well as in areas that have typically not been at risk of a 100-year flood event. It made these conclusions using models that predict climate changes into the future.
Currently, the average estimated annual total loss for the 5.7 million properties in the U.S. that have flood risk exposure is $20.3 billion. That's an average loss of $3,548 per property that is impacted.
Using climate projections for 30 years into the future, or 2051, the estimated annual flood loss for the country will be $34 billion, or $5,913 per property.
What you can do
Now, I know this sounds very confusing, and IT IS! But the key takeaway here is this- areas that typically never flooded before, someday will. And, properties that are currently in high-risk areas will experience more incidents coupled with an increase in severity.
If you do not currently have flood insurance but are concerned that your home is at elevated risk due to the changing climate, you can read the First Street report here. It lists flood-prone areas in all states, including those that are not currently in SFHAs.
If you currently have Flood Insurance and concerned about the increase in premiums that will be coming, please give us a call; we have private flood carriers that meet the requirements of the NFIP and are acceptable to lenders, often times charging much less than the government regulated National Flood Insurance Program.