Risk Rating 2.0's implications for homeowners, new buyers
Nearly 4 million policyholders in the country will soon see price hikes, especially along coastal areas such as South Florida.
The updated flood risk pricing methodology, which marks the biggest change in calculations since 1968, is expected to bring price hikes and disruption. Here’s what the shift might mean for real estate clients.
Risk Rating 2.0, means Federal Emergency Management Administration (FEMA) won’t use flood zones to calculate flood insurance rates and will instead look at a property individually to determine its risk. Factors used to gauge the risk include the distance to water, elevation, foundation type, structure replacement cost, and how many and what types of floods affect a property.
Nearly 4 million policyholders in the country will soon see price hikes, especially those along coastal areas such as South Florida. According to the National Flood Insurance Program (NFIP), 40% of flood insurance claims come from designated high-risk flood areas.
It’s a long-overdue change, according to Luis Gazitua, partner at Miami-based JAG Insurance Group.
“This is something that was necessary in terms of keeping up with a more accurate description of rating properties individually. Before, the old system didn’t really keep up with any change, and the pricing wasn’t set adequately enough,” Gazitua said.
When advising South Florida property owners and investors on flood insurance, Gazitua recommends doing some research before accepting the price as is.
“I think around 80% of everyone in Florida is going to have an increase on their flood insurance program, so will they increase $100 or $1,000? It’s going to be a hard job to shop around and get people options,” Gazitua.
The price hike will vary from home to home, and even adjacent properties could be paying different rates.
“Now, you’re not required to submit an elevation certificate. Historically, homes built post-1979 had to submit an elevation certificate to get a quote through FEMA. They bypassed that because you’re looking at other data and treating homes more individually,” said Gazitua.
Impact on homebuyers
Potential buyers should especially be proactive, so they’re not hit with sticker shock at closing, in Gazitua’s view. Policies that renew on or after April 1, 2022, will use Risk Rating 2.0 pricing.
“My fear is how they’re going to implement it, as far as the government itself. What they tell us is if the rates go up, say, 200% on a certain property, they’re going to cap it at about 20% and roll it out for the next five years. It’s good and bad because some of these sticker shock renewals are not going to stop after 12 months. Some of these coastal properties will see 20-25% increases for the next five years,” Gazitua said.
For buyers who need financing, the rollout could cause some issues.
“There’s a lot of people who are buying and their closings have been pushed back to October, and we quoted their insurance for them in September and now, some of those flood policies are locked in. Especially first-time homebuyers, everything is so tight as far as the debt-to-income ratio to qualify, but now we have clients who paid $700 for a flood policy, but now we close and we have to rerate it. It could go up to $1,500,” Gazitua said.
Gazitua noted it’s important for investors and potential property owners to obtain as much information as possible about a property to help insurance agents find the best rates.
“The national flood program does have some ways of being able to grandfather some pricing. The biggest issue will be the coastal areas where it’s underpriced and higher risk,” Gazitua said. “I think asking and talking to your insurance agent and looking more at the private insurance options that are out there, which were historically more expensive. I think now they’re going to be more in play in terms of being competitive.”
Although the new risk rating is taking effect, Gazitua said there are a few things about the price hikes that are still unclear.
“There’s still no transparency about why each home is going to be rated differently. I think, hopefully, through time, that will clear up, but I’m a little worried about the rate discrepancy, how they’re going to do it and how it’s going to get rolled out,” Gazitua said.
According to FEMA, policyholders’ homes that are valued lower are paying more, while homeowners with more expensive homes pay less than their share of the risk. FEMA said that since the new risk rating factors rebuilding costs, it can distribute premiums across all policyholders based on home value and a property’s unique flood risk.
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