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The National Flood Insurance Program is adopting an approach to rating flood risk that has been employed by the private market for years and that can more accurately capture an individual property’s true risk of flood and price that risk more appropriately, experts say.
There are lingering concerns, however, about a lack of transparency over the new risk rating system. Meanwhile, legislative proposals to reauthorize the program ahead of another expiration are being debated, but unresolved questions such as how to handle the program’s current debt could prevent an overhaul package from moving forward.
“We’re going to change an insurance rating structure that hasn’t fundamentally been changed since the 1970s,” said David Maurstad, deputy associate administrator of the Federal Insurance and Mitigation Administration of the Federal Emergency Management Agency and chief executive of the NFIP. “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.”
More information about effects on policyholder will be released in the coming weeks, but the new rating system will be “data-driven” and factor in different variables rather than basing flood insurance premiums simply on whether or not a property is in a flood zone, Mr. Maurstad said. For example, the new system will determine a policyholder’s flood risk by incorporating elements such as different types of flooding — heavy rainfall from a hurricane, river overflow or coastal surge — and a building’s distance to a coast or river.
“I think the concept is phenomenal,” said John Dickson, president of Aon Edge in Kalispell, Montana, which sells flood insurance policies. “What they’re trying to do is what the private industry has been working on for years, which is defining rates that are more tailored to the risk associated with an individual location. The situation you have today where an A zone in Florida is the same as an A zone in Iowa, that gets addressed substantially with Risk Rating 2.0, at least as far as the concepts go.”
The movement away from mandating flood coverage based on predefined zones toward a more individualistic approach to rating properties was widely praised, because property owners have often mistakenly believed they did not need flood insurance if they were outside of the zone and not required to purchase coverage to comply with requirements of their federally backed mortgages — a misperception that proved costly in places like Houston after Hurricane Harvey.
“It’s a timely upgrade of the NFIP program, including tying the premium to the actual flood risk of the property rather than the artificial 100-year flood zone boundaries that they do their rating off of right now,” said Jim Albert, CEO of private flood insurer Neptune Flood Insurance. “It changes the game in the required and not required definitions … and the confusion that generates in the market of people confusing ‘not required’ with ‘not needed.’” But there is uncertainty over how Risk Rating 2.0 will work, stakeholders say.
“In my experience, FEMA likes to play things very close to the vest,” Mr. Dickson said. “What tends to happen is they have really great ideas, but they do limit the input and they do limit the number of constituents and stakeholders who get to see the entire concept. When that happens, you’re not getting a full view, and unexpected, unintended pricing issues happen.” But stakeholders express cautious optimism about the few details that have been released, such as the fact that FEMA will add a rainfall metric to the mix, particularly in light of hurricanes Harvey and Florence, which dropped significant rain in a short period of time, leading to major flooding.
“There’s a changing nature of storms,” Mr. Albert said. “Hurricanes don’t just sweep in and out of the area in a few hours. Both of those storms came and sat for days.”
The House Financial Services Committee is debating drafts that would extend the NFIP to Sept. 30, 2024, and raise the limits of coverage from $250,000 to $500,000 for residential properties and from $500,000 to $1.5 million for commercial properties.
“If they raise the available limit, it would really help the NFIP because they could then charge against a higher limit and collect a more accurate premium,” said Craig Poulton, CEO of Salt Lake City-based Poulton Associates Inc., the underwriting manager and administrator of the Natural Catastrophe Insurance Program, a private flood insurer. “But even if that doesn’t happen, if the NFIP implements Risk Rating 2.0 and … they implement the rates logically, in the way the private market would implement them, then (the replacement costs) issue should be a thing of the past.”
The draft legislation would cancel the NFIP’s existing debt, which House Financial Services Chair Maxine Waters, D-Calif., supports but continues to be a significant point of contention.
A “glaring omission” is “a mandate that Risk Rating 2.0 and anything that comes after it … has to be actuarially defensible,” Mr. Poulton said. “Congress has to tell the NFIP in no uncertain terms that they need to design their rates so they will not go to the Treasury for money anymore.”
The committee held a hearing on the bills in March. Tom Santos, vice president of public policy advocacy for the American Property Casualty Insurance Association in Washington, called it “a good first step.” “It will be May 31st before we know it, though,” he said, referring to the NFIP’s scheduled expiration. “The clock is ticking.”
Draft legislation for a comprehensive overhaul of the National Flood Insurance Program would strengthen the program’s flood risk mapping and mitigation initiatives, experts say.