The need persists to better protect homes from climate change
While the NFIP's Risk Rating 2.0 goes further than federal policies have in the past, there is still room for improvement.
On Oct. 1, 2021, the Federal Emergency Management Agency’s new pricing structure for the National Flood Insurance Program (NFIP) officially kicked off.
Known as Risk Rating 2.0, it is advertised as a way to more equitably pay for the billions of dollar in damage racking up because of historical government subsidies and climate change.
While Risk Rating 2.0 goes further than federal policies have in the past, there is still room for improvement.
Dollars and sense
The new rating system “leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarially sound, equitable, easier to understand, and better reflect a property’s flood risk,” the agency says.
But like climate change itself, the new rating system will have repercussions far beyond this year’s price increases.
Flooding is the most costly type of natural disaster in America, and climate change is accelerating its impact. Recent research from Stanford University found that between 1988 and 2017, one-third of financial damage from floods — nearly $75 billion — was due to increased precipitation brought on by climate change.
And in 2017, the Union of Concerned Scientists published a study that showed the number of communities facing chronic flooding from rising sea levels will jump to 170 in 20 years, and as many as 670 by the end of the century.
Premiums increase
In part to address the costs of climate change, the NFIP has already increased rates for most new home buyers. In April 2022, Risk Rating 2.0 will kick in for all five million existing NFIP policyholders, and more than 75% of current policyholders will start to see their premiums go up. Sadly, they will continue to go up by as much as 18% for the next 10 years before reaching actuarial sound pricing.
Most homeowners will see modest increases; the average increase will be about $100 a year. But a few unlucky policyholders — almost 3,200 mainly in Florida, Texas, New Jersey and New York — could see their costs balloon by as much as $14,400 a year.
What’s more, inland dwellers in Iowa, Missouri and Nebraska will see their government-backed premiums go up, too.
First Street Foundation, a not-for-profit focused on making climate risk easy to understand, reported that 2.7 million homes outside of high-risk mandatory flood zones are at substantial flood risk. Taken together, this means that most NFIP policies in nearly every state are poised for price increases.
Global warming bares down
There’s little doubt that the rating system needs to change in the face of climate change. But more needs to be done to protect homeowners. For instance, NFIP flood insurance requires a 30-day waiting period, which means an individual home could go a month with effectively no flood insurance. (Normal homeowners insurance doesn’t cover flood damage.)
The NFIP also caps out at $250,000 of building coverage, which is no longer enough to rebuild many homes.
Climate change will drive intensity and frequency, so optional coverages such as temporary living expense clauses highlight considerable gaps in the NFIP’s offering.
There is a bright spot: Private insurers have stepped in with shorter wait periods, higher limits and consumer-friendly optional coverages.
Climate change-affected storms are the new norm. And while Risk Rating 2.0 is an improvement in putting the NFIP on sound financial footing, it doesn’t quite go far enough to protect homeowners.
Until it does, private firms can offer consumers alternatives to plug any holes in their coverage.
Trevor Burgess (trevor@neptuneflood.com) is the president and CEO of Neptune Flood Insurance. These opinions are the author’s own.
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