Risk Rating 2.0

After nearly a decade of work to revamp the National Flood Insurance Program, the FederalEmergency Management Agencyhas begun implementing a new floodinsurance price methodology calledRisk Rating 2.0: Equity in Action.These changes took effect on Oct.1, 2021 for new policies, but will nottake effect for the renewal of existingpolicies until April 2.

Before Risk Rating 2.0, FEMA had not updated the rating system in nearly half a century. According to FEMA, under Risk Rating 2.0, each home is priced individually, rather than by flood zone, using modern industry technologies, more flood risk variables, and property-specific characteristics which include elevation, distance to water, and the cost to rebuild. Risk Rating 2.0 also comes with the adoption of modern insurance industry technologies, practices, and standards. With the old methodology, the maximum single-family home policy costed $45,925, but with RiskRating 2.0, the maximum single-family policy costs $12,125. Since each property is now rated individually, only a licensed insurance agent can properly assess a property to identify whether rates will increase or decrease under the new system.

This new system only applies to risk-based National Flood Insurance rates and will not affect flood mapping or insurance requirements, which are enforced by Congress, local communities, and lenders. According to FEMA, grandfathered rates, including those for new newly mapped or pre-Flood Insurance Rate Map properties, will also continue, and policyholders can transfer their grandfathered rates and other discounts to a buyer by assigning their flood insurance policy at the time of the sale.

While NJ Realtors® has been looking forward to FEMA updating the rating system for NFIP, the association has concerns about Risk Rating 2.0 and its impact in New Jersey. According to FEMA’s own analysis on the implementation of Risk Rating 2.0, nearly 80 percent of policyholders will see immediate premium increases through no fault of their own. This is largely a result of the new process taking home value into effect when determining rates. While the stated goal of Risk Rating 2.0 was to help low-income policyholders, this can result in high rates that are not representative of the flood risk a home has, leading to an affordability issue for those policyholders.

NJ Realtors ® shares these concerns with New Jersey Sen. Robert Menendez, who has been a longtime ally with NJ Realtors ® on the issue of the NFIP following the detrimental impact of Hurricane Sandy. The NJ Realtors ® Government Affairs Department has been working with Sen. Menendez on legislation to help address many of the problems with Risk Rating 2.0 and many of the underlying problems with NFIP. His bipartisan bill, The National FloodInsurance Program Reauthorization and Reform Act will remove the long-term uncertainty of the program by providing five years of reauthorization. The bill also addresses the steep rate hikes many will see, by capping annual increases to 9 percent, as opposed to the previous 18 percent cap.

Under the program, it is estimated that within the next decade, 900,000policyholders will leave the NFIPprogram due to rate increases, but with Sen. Menendez’s reform, we can help ensure growing rate costs do not push policy holders out of the program.NJ Realtors® goal is for policyholders to stay in the program especially as we enter the riskiest time of what is anticipated to be an above-normal hurricane season.