The potential insurance-industry impact of Risk Rating 2.0
Now is the time for those without a flood policy to purchase one before they have to buy at the revised risk rate.
The National Flood Insurance Program (NFIP) has not updated its risk rating methodology in more than 50 years of existence — until now.
Like many things, the implementation of this program was delayed by a year due to the COVID-19 pandemic. While this modernization is long overdue, it has become a source of confusion for agents and concern for homeowners who worry that they won’t be able to afford their flood insurance policy in the future.
Risk Rating 2.0 is a step toward delivering more data-driven coverage through the NFIP, but there are a few things agents need to communicate to homeowners before its scheduled launch on Oct. 1.
How Risk Rating 2.0 will use data
Under the new rating system, premiums will be based on the individual characteristics of the property, not just where it sits on a flood map. These characteristics include:
- Distance to flooding source and flood type;
- Building occupancy;
- Replacement cost value;
- Construction type;
- Foundation type;
- First-floor height;
- Number of floors, and
- Prior claims.
By adopting an algorithm that can distinguish between the risk to a property located beside a brook in Nebraska versus a waterfront condo in Miami, the program will help deliver more data-driven rates through the NFIP.
The impact on agents and insureds
Risk Rating 2.0 should save agents time in the quoting process, but there will be some new information to master this year in order to support policyholders. In some cases, starting Oct. 1, agents handling renewals will need to do the work to determine whether pricing is better under the new methodology or not.
For property owners, the impact of Risk Rating 2.0 will depend on where they live and whether they already have a flood insurance policy:
- A few lucky flood policyholders whose risk decreases under the new methodology may see their rates may go down.
- Those who don’t yet hold a flood policy and aren’t aware of their local flood risk may find themselves faced with steep premiums.
To avoid the latter, now is the time for those without a flood policy to purchase one before they have to buy at the revised risk rate. This will ensure that they get on the glide path toward their full risk rate with the assurance that their rate won’t increase more than 18% percent year-over-year, in most cases.
NFIP rates will rival the private market
The new methodology resembles those used in the private insurance sector. Why does this matter?
Risk Rating 2.0 aligns the interests of the government with the private sector. This creates an opportunity for the private sector to capture market share, and the result will be that consumers have more choices, better coverage, lower premiums and reduced waiting periods.
As the weather has become more extreme, our ability to forecast natural catastrophes also has become better than ever. Insurers are taking note. Risk Rating 2.0 brings the NFIP in line with how we calculate the risks associated with all other perils. There will be premium increases, however, for many property owners who underestimate their current flood risk.
A recent study from the First Street Foundation estimated that under Risk Rating 2.0:
- Seven million properties at risk of flooding outside of Special Flood Hazard Areas (SFHAs) would require a five-fold annual premium increase to cover their current flood risk.
- Five million properties within SFHAs will see as much as a four-fold increase in their annual premium.
This is why now is the time for flood agents to get the word out and educate the folks in their book of business about the importance of purchasing a flood policy before the methodology changes.
Lindsey Erickson is CEO of National Flood Services, which is among the country’s top insurance companies. The Kalispell, Montana-based agency manages more than 1.5 million policies.
Any opinions expressed in this column are the author’s own. This piece is published with permission from the author and may not be reproduced.
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