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The National Flood Insurance Program is launching a new risk rating system for its flood insurance policies.
David Maurstad, deputy associate administrator of the Federal Insurance and Mitigation Administration and chief executive of the NFIP, called Risk Rating 2.0 a “game-changing initiative for the NFIP” during a media call on Monday.
“Most people don’t understand their risk,” he said. “If you look at the flooding in Nashville and my home state of Nebraska that is going on right now, unfortunately most people in those areas don’t have flood insurance. If we have a better product and people understand what their risk is, we will have more insured survivors, and that means less disaster suffering.”
More information about policyholder impacts and the implementation timeline will be released in the coming weeks, but the new rating system for flood risks will be “data-driven” and factor in different variables rather than basing flood insurance premiums simply on whether or not a policyholder is in a flood zone, Mr. Maurstad said. For example, the new system will determine a policyholder’s flood risk by incorporating elements such different types of flooding — heavy rainfall from a hurricane, river overflow or coastal surge — and a building’s distance to a coast or river.
“We’re going to change an insurance rating structure that hasn’t fundamentally been changed since the 1970s,” he said. “We’re going to consider more flood risks than we currently do now. It is going to be based on replacement costs of the properties.”
The intention is to try to “close the insurance gap,” Mr. Maurstad said.
“Just changing the rating doesn’t guarantee that we’re going to have more policyholders,” he said. “My belief is that with the changes that we’re making in Risk Rating 2.0 of actually showing the rate based on site-specific conditions, that that will create greater demand for our product as people get a better understanding of what their real flood risk is. I think the current in or out, required or not required based on whether you have a federally backed mortgage — that discussion is going to, I believe, change as this new risk rating goes into play and people even outside the high-risk areas will have a better understanding of what their specific risk is. Once we create that demand or they understand their need for it, they will take the responsible action and insure for flood just like they insure for windstorm, hail and fire.”
Some rates will increase while others will decrease, Mr. Maurstad said. “We don’t know what that looks like at this point in time,” he said. “We will as this gets more fully developed. But most importantly, we’re going to have a new rating structure that is fair, easier to understand and articulates to folks what their true risk is.”
But the new rating system will not address the issue of repetitively flooded properties specifically, as current NFIP authority does not require or facilitate additional charges for these properties. Addressing the multiloss properties issue will likely continue to be a discussion point with reauthorization of the program, according to the Federal Emergency Management Agency.
While these properties comprise just 1% of the claims filed through the NFIP, they have historically accounted for between 25% and 30% of the program’s losses, according to research by the Pew Charitable Trusts in Washington.
Reform of the National Flood Insurance Program should include a shift toward risk-based premium rates so property owners know the true cost of the risk and an emphasis on mitigating the risk for repeatedly flooded properties, according to experts.