When FEMA announced the transformation of the National Flood Insurance Program (NFIP) with the updated and modernized rating program dubbed “Risk Rating 2.0," questions and concerns were raised from various industries.

Insurance agents were concerned with the potential impact on their books of business. Floodplain managers questioned how rating and mitigation would be linked. Homeowners and real estate professionals raised concerns about premiums and flood insurance requirements.

As FEMA begins to release details around Risk Rating 2.0 in 2021, it's clear that the NFIP transformation will not just impact insurance rating—it will impact the entire flood industry.

From private flood insurance companies to floodplain managers, each stakeholder will be influenced by Risk Rating 2.0's implementation. With better risk communication, different strategies around insurance rating, and solutions to past legislative concerns, the NFIP will be better positioned to close the massive flood insurance gap.

Surge in Interest

FEMA has branded Risk Rating 2.0 as “Equity in Action"—and it's easy to see why. Equity in Action will revolutionize the way the NFIP rates are structured, making the process fairer and easier to understand for those looking to purchase federal flood insurance. Equity in Action replaces the binary “in versus out" of flood zone pricing methodology and replaces it with “graduated" rating, which determines premiums based on factors such as distance to water; types of flood exposure, such as coastal erosion, riverine and ocean; and other advanced elements.

Equity in Action will also bring more equity to policyholders within the NFIP by partly basing rates on a building's replacement cost. The higher the replacement cost, the more expensive the premium could be, and vice versa.

Before FEMA released details of Equity in Action, there were numerous reports that rates could increase by thousands of dollars a year for NFIP policyholders, such as the First Street Foundation's estimation that the rates could be 4.5 times higher than they are today. Conversations and a media storm followed the release of that report.

A month later, FEMA's press release on Equity in Action and state fact sheets showing accurate rate changes were widely circulated:

• 11% of NFIP policyholders will see a premium increase of over $120 per year.
• 63% of policyholders will see premium increases of $0 to $100 a year.
• 23% of NFIP policyholders will see a premium decrease.
• 60% of Pre-Flood Insurance Rate Map structures will see a premium reduction when the new rates become effective.

But within all of these discussions lies a bigger story: For the first time, those who never heard of or cared about flood risk began to talk about the topic.

Insureds are calling agents everywhere, asking what could happen to their house if flooded and if they should buy a flood insurance policy. Real estate agents are asking for tools to understand flood risk and having discussions with their clients about the flood risk of properties. Now, flood insurance is a mainstream conversation.

“With the NFIP splitting the initiation of new rating between Oct. 1, 2021, and April 1, 2022, agents should expect a high volume of policyholders requesting a quote to see their new rate," says Jim Albert, chairman and co-founder of Neptune Flood Insurance. “Since 77% of NFIP policies will be increasing due to Risk Rating 2.0, agents should quote private flood at the same time now and in the future."

Communication About Risk Simplified

In the past, it has been a challenge communicating to insureds how property modifications would lower their flood insurance premium.

As agents, our response to these questions is typically, “Elevate your building," or “Add venting to your enclosure." These actions often are not viable for our insureds. When mitigation options do exist, insureds ask, “How high should I elevate?" “What's the most I can save?" or “What's the cost to mitigate?"

The coming changes to the NFIP bring better solutions and answers to these questions. Under Equity in Action, one such solution will be premium credits available for the elevation of mechanical equipment, which currently is not a creditable mitigation activity under the NFIP.

Equity in Action will also make it easier for agents to communicate flood risk to insureds and how premiums reflect risk. For example, currently, when insureds ask what their flood risk is and the premium associated with it, agents can point to the flood insurance rate map and explain that they are in a high-risk flood zone. But under Equity in Action, agents will be able to explain that rates are based on the distance to a water source, first-floor elevation, past losses and other logical parameters.

Educating stakeholders becomes easier since there will no longer be complicated grandfathering scenarios, elevation certificate explanations or convoluted mitigation solutions. Stakeholders such as real estate professionals will also be able to clearly understand the flood risk and cost of insurance on a particular home. This also applies to community officials who help their constituents understand the impact of flood risk and its effect on the cost of building in the floodplain.

As Equity in Action is implemented, the future of flood risk communication will continue to be perfected and will evolve.

Agents will also be able to use the NFIP's new quoting system to make the quoting process easier. For example, the new rating system will now be able to generate a quote without the help of an elevation certificate, an option some private flood insurers currently offer in their rating systems.

Overall, what FEMA will accomplish in the transformation is making the NFIP part of a rapidly evolving and competitive flood insurance environment where insureds ask to see a quote from multiple carriers, one of them being the NFIP.

The NFIP is also changing how premium reductions are calculated for home elevation. Right now, the maximum premium credit for a home elevation occurs when the lowest floor for rating is at 4 feet above the base flood elevation. This inevitably limits what an insured considers for a home elevation in order to achieve a cost-benefit to their premium. But with Equity in Action, the higher you go, the less the premium will be.

Because no zone or base flood elevation is used for rating purposes, mitigation credits are applied everywhere, in and out of the high-risk flood zone.

These changes will not only make it easier to communicate how to mitigate to reduce insurance costs, but it will enhance the flood resilience of our flood-prone communities.

When insureds ask questions regarding the cost-benefit of mitigation projects, agents can give them more mitigation options and simpler solutions. When insureds ask if it matters where the house is in order to receive those credits, agents can communicate that easily by responding, “Anywhere."

These changes also benefit our communities. As the financial benefit of mitigation grows, so will the elevation and mitigation of buildings. There will now be an incentive to elevate beyond today's minimum standards since new NFIP rates will consider higher building elevations and more mitigation options.

These changes to NFIP rating methodology will inevitably impact the entire flood insurance industry. Once Equity in Action takes effect, private flood insurers may find expanded or changed opportunities to sell policies that will close the insurance gap.

While private flood companies do not regulate the floodplain like the NFIP does, they can benefit from enhanced building mitigation. As more structures and mechanical equipment are elevated, private flood insurance companies may consider those buildings as less risky to insure. Essentially, the mitigation elements of Equity in Action will have a trickle-down effect that benefits other stakeholders—and it's why FEMA is branding Risk Rating 2.0 as Equity in Action.

Legislative Answers

In April, the U.S. House Financial Services Committee shared a draft NFIP reauthorization bill. The bill, among other elements, proposes lowering the annual increase cap on NFIP premiums to 9%. This was a clear reaction by Congress to Equity in Action. In FEMA's information about Equity in Action, they note that policy premiums will increase up to the maximum statutory cap. That cap is currently set at 18%. 

While Congress has added language to resolve standing concerns with Equity in Action, problems for which legislative fixes have been proposed in the past are in some ways solved under the transformation. For example, past legislative proposals asked FEMA to consider replacement cost when determining rates. That will be a part of rating considerations. Equity in Action will address long-standing programmatic issues that Congress may no longer need to address in forthcoming flood reform.

However, there are still quite a few legislative issues and priorities to tackle. Draft legislation released in April attempts to address an NFIP affordability program, forgiveness of NFIP debt, allowing insureds to leave the NFIP and retain continuous coverage grandfathering, among others.

As FEMA continues to rebrand Risk Rating 2.0 as Equity in Action, it's easy to see how flood insurance premiums through the NFIP will be more equitable. Equally important to understand is that the change that FEMA is planning will impact far more stakeholders than just those who interact with NFIP insurance.

From floodplain managers to real estate professionals, the future of Equity in Action modernizes the NFIP in a way that has not been seen in the 53-year history of the program. Whether stakeholders involved appreciate the changes or not, Risk Rating 2.0 will change the landscape of insuring against and communicating flood risk.

Joe Rossi is a flood specialist at RogersGray Insurance and chairman and executive director of Massachusetts Coastal Coalition.