Real-world costs get their due

A new rating initiative for the National Flood Insurance Program may cause some short-term pain for buyers of flood coverage but is a necessary step toward putting the program on sound financial footing, experts say.

In March, the Federal Emergency Management Agency announced adoption of an approach to rating flood risk — dubbed Risk Rating 2.0 — that experts say can more accurately capture an individual property’s true risk of flood and price that risk more appropriately. But in June, Rep. Maxine Waters, D-California, chairwoman of the U.S. House of Representatives Financial Services Committee, vowed to resist efforts to significantly raise premiums.

“The overall intent of it is to make sure policyholders are paying rates that more closely reflect their flood risk,” said Laura Lightbody, director of the Flood-Prepared Communities initiative of the Pew Charitable Trusts in Washington. “There may be some short-term heartburn for what could ultimately be a longer-term emphasis on rates reflecting true flood risk.” 

Rep. Waters said her concerns were rooted in her previous experience with the Biggert-Waters Flood Insurance Reform Act of 2012, which intended to put the NFIP on a more fiscally sound path but featured reforms that Congress rolled back amid pressure from constituents over premium rate increases.

Such concerns are “certainly valid,” said Jon Gentile, vice president of government relations for the National Association of Professional Insurance Agents in Washington.

But the initiative has “great potential to advance the entire industry,” said John Dickson, president of Aon Edge in Kalispell, Montana. 

“Risk Rating 2.0 is intended to say ‘if you have a very risky location, you’re going to have to pay the right premium for a financial services program to bear that risk,’” Mr. Dickson said. “By its definition, the risky locations are not going to be affordable. They shouldn’t be because of the scope of the risk.”