The National Flood Insurance Program’s new premium rating methodology, Risk Rating 2.0 will go into effect Oct. 1, 2021, for new policies, but for policies that renew between Oct. 1, 2021, and April 1, 2022, the Rating 2.0 rates also are available, if they are beneficial to policyholders.
PIACT’s and PIA National’s past President Tim Russell, CPCU, is the chairman of the Flood Insurance Producers National Committee. He was involved in developing the program.
Recently, PIA Northeast asked him some questions about the development process and how the program affects agents and their clients.
What was your part in developing the NFIP’s Risk Rating 2.0?
The Flood Insurance Producers National Committee provides the Federal Insurance and Mitigation Administration with expertise in the areas of flood insurance product design and development, producer education, the realities of marketing and servicing the NFIP, and the community/buyer temperament.
FIPNC also provides professional advice and counsel on all issues related to insurance agents’ involvement in the NFIP. The FIPNC committee is made up of flood insurance experts from the three major agent associations, as well as representatives from the Association of State Floodplain Management.
FEMA/FIMA started planning Risk Rating 2.0 about four years ago. They have included FIPNC in the planning and development of RR2.0 since the beginning.
How does the new program differ from the previous one?
RR2.0 is a far more equitable way of pricing flood insurance. There are several ways that the current rating system subsidizes premiums (e.g., pre-FIRM rates, grandfathering). One of those ways is by lumping houses into flood zones.
For instance, an AE flood zone might stretch from the flooding source to a mile away from that flooding source. If you were to have the same exact house—say a 1,500 square foot ranch home built in 1950 with a basement—located 250 feet from the flooding source or located a mile away from the flooding source in that AE zone, the current rating plan would develop the same exact premium for both houses.
Obviously, the two houses have a different flooding risk, yet they are charged the same premium. Effectively, the homeowners a mile away from the water are overpaying for their flood insurance. And, the owners of the house that is closer to the flooding source are underpaying—subsidized by the premiums paid by the homeowners a mile away.
RR2.0 corrects this discrepancy by rating the policy based on a house’s individual location. In addition to distance to the flooding source, RR2.0 recognizes the type of flooding source. For instance, is the flooding source an ocean, a lake, a river, or an urban setting with lots concrete and nowhere for the water to run off?
In addition to the distance from and the type of the flooding source, RR2.0 considers the property’s individual ground elevation (thanks to additional data sources beyond the traditional flood map), the cost to rebuild, the occupancy, construction type, foundation type, first floor height, number of floors and prior claims history.
How will agents be affected by these changes? What do they need to know to better advise their clients about the NFIP and flood insurance?
Like most human beings, insurance agents tend to be averse to change. There is a fear of the unknown. The best way to address this is to embrace the change and to get educated! To help, FEMA and FIMA have developed RR2.0 training (for details, see www.agents.floodsmart.gov/agents-guide/risk-rating). The more you know, the better you can help your clients.
One of the things that I believe agents will like about RR2.0 is that it will be much easier for an agent who is unfamiliar with flood insurance to rate a policy. You will no longer need to know the house’s flood zone, and you will no longer need to input the information from a Flood Elevation Certificate (unless it is beneficial to the policyholder). This is because the rating engine is pulling in a lot of information on the home based on its address.
Hopefully, this ease of doing business will lead to more agents being comfortable with rating flood insurance and an uptick in policy count.
An agent also will be able to assign a policy from a house’s seller to the buyer and switch Write-Your-Own policies at the same time. For instance, currently a flood policy written with USAA can only be assigned to the buyer if the buyer also is a USAA member.
Under RR2.0, an agent can assign the policy to the buyer and transfer the policy to his or her WYO company. To do this, the agent will only need to know the prior policy number and the National Association of Insurance Commissioners’ code for the issuing company.
One thing I think agents will think is cool is that on the declarations page it will show the current premium as well as the actuarial sound premium. Currently, the actuarial sound premium is kind of a mystery.
Now, we will be able to tell our clients that they are paying X now, but the premium will eventually grow to Y. The increase will grow at the current statutory limits of 18% a year for a primary house or 25% for a secondary or rental house.
The maximum premium for a single-family home under RR2.0 is $12,125.
How will the new NFIP RR2.0 affect clients?
Under RR2.0, 23% of current policyholders will receive immediate decreases upon renewal. An additional 66% will receive an average increase of $0-$10 per month. Seven percent of policyholders will have an increase of $10-$20 a month, while only 4% of policyholders will see an increase over $20 per month.
I believe that policyholders who know their true risk (or actuarial sound) premium will lead to more policyholders mitigating their houses against flood loss. The policyholders will receive premium credits for mitigation, whether that is raising the house, raising the machinery, flood venting, etc.
Is there anything else you’d like to share?
We can get behind that! Thank you, for taking the time to talk with us, Tim.
You can learn more …
It’s important that you are prepared for FEMA’s RR2.0, when it arrives this October. PIA National has created a webpage for agents to keep track of important dates related to RR2.0 and training provided by the Federal Emergency Management Agency. For more information on RR2.0 and for updates, visit the RR2.0 page on the PIA Advocacy Blog. And, read WHAT?!?!–FEMA Risk Rating 2.0 on PIA Northeast News & Media.