What Is Staying & Changing Under Risk Rating 2.0: Equity in Action?

The National Flood Insurance Program’s (NFIP) new rating methodology, Risk Rating 2.0: Equity in Action, has modernized how the NFIP rates flood insurance premiums. However, agents should know that some aspects of the program have not changed since its implementation on Oct. 1, 2021. Here’s a summary of what has stayed, changed, or lapsed when it comes to Risk Rating 2.0: Equity in Action:?

What Has Stayed?

While Risk Rating 2.0: Equity in Action is transformational, some aspects of the program have not changed. For example, policy forms and coverage limits have remained under the new methodology, with a limit of $250,000 for single-family structures and $100,000 for contents. The three main types of policy forms for Dwellings, General Properties, and Residential Condominium Building Association Policies (RCBAPs) have also remained under Risk Rating 2.0: Equity in Action.?

FEMA has also upheld statutory rate caps set by Congress as well as premium discounts for Pre-FIRM Subsidized and Newly Mapped properties under the new methodology. Policyholders will still be able to transfer their discounts by assigning their flood insurance policies when property ownership changes.?

Finally, policyholders in communities that participate in the Community Rating System (CRS) will continue to earn NFIP rate discounts of 5 percent to 45 percent based on their CRS classification, regardless of whether a structure is inside or outside of the Special Flood Hazard Area (SFHA).?

What Has Changed?

Though some key program features remain under the new methodology, FEMA has made several changes to ensure a modern approach to flood insurance pricing. As part of FEMA’s goal to communicate each policyholder’s full-risk premium, replacement cost value (RCV) has become a main component in rating premiums. Under the new methodology, FEMA uses a third-party estimating tool to determine the RCV for single-family homes, two-to-four family buildings, mobile/manufactured buildings, and residential unit occupancy types, with all other occupancy types using a customer-provided replacement cost.?

Additionally, while a property’s flood zone will continue to be used in some places where it is required by statute, including in AR, A99, and Newly Mapped zones, flood zone is no longer a main factor in premium rates. While Base Flood Elevation (BFE) will also continue to be used for floodplain management, FEMA now uses First Floor Height, which is based on the ground elevation, in rating premiums.?

Next, since FEMA will be able to differentiate flood risk in areas outside high-risk flood zones under the new methodology, there is no longer a need to offer the Preferred Risk Policy (PRP) insurance product. PRP customers now see premiums rated along the lines of how all other policies are rated, regardless of flood zone. Moreover, coverage and deductible amounts will no longer be limited, ensuring PRP customers can personalize coverage based on what works for their homes or businesses.?

Under the new methodology, FEMA has also changed how it evaluates prior NFIP claims. Policyholders with no prior losses will not see their premiums increase upon renewal due to a first claim. After a policyholder’s first claim, policyholders with two or more prior losses will only see their rates reflect claims over a 20-year period. It is important to keep in mind that this does not change the Severe Repetitive Loss requirements.?

In addition, FEMA is using six simplified foundation types under the new methodology, including Slab on Grade; Basement; Crawlspace; Elevated without Enclosure on Post, Pile or Pier; Elevated with Enclosure on Post, Pile or Pier; and Elevated with Enclosure Not Post, Pile or Pier.??

Finally, under the new methodology, FEMA no longer requires Elevation Certificates (ECs) in rating but will continue to allow policyholders to use ECs to improve their premiums; the new methodology also allows all policyholders to use Section E of the policy form, which is now free to policyholders. Mitigation credits, such as the Machinery & Equipment (M&E) credit and flood openings credit, will also be available to properties in all flood zones, not just those in the SFHA.???

Risk Rating 2.0: Equity in Action is bringing generational change to the NFIP as we continue building a culture of preparedness, improving individual and community resilience, and reducing disaster suffering. Speak with your customers today about changes associated with Risk Rating 2.0: Equity in Action to explain how it may affect their premiums.