How FEMA’s Risk Rating 2.0 is Changing the Flood Industry

FEMA has been releasing information on Risk Rating 2.0: Equity in Action; their new pricing methodology for the National Flood Insurance Program (NFIP). Equity in Action is set to be implemented starting October 1^st, 2021, for new policies and renewals starting April 2022. FEMA states that Equity in Action uses the “best practices and cutting-edge technology” to provide rates that are “accurate, sound, equitable, better reflect risk, and are easier to understand”. With different rating strategies, new risk communication, and new solutions the NFIP will now have a better chance of closing the flood insurance gap.

This new system is structured to make the rating process easier and fairer when it comes to purchasing federal flood insurance. It does this by determining premium based on factors like distance to water, types of exposures, and coastal erosions. It also will partially base rates on the building’s replacement cost. On the flip side, premium reductions have been changed. Under Equity in Action the higher the home elevation the less premium will be and a credit for elevation of mechanical equipment will be available.

Equity in Action will also make it easy to educate insureds. Gone are the days where agents will point to a map and tell an insured they are in a “high-risk flood zone”. Now agents will be able to use real data about the insureds distance from water, first-floor elevation, past losses, and other parameters to explain their risk and premium. Grandfathering, elevation certificates, and mitigation solutions will be a thing of the past when determining flood risk. Insureds and real estate agents will be able to understand flood risk and cost easily.

New guidance and information is continuously being released regarding Risk Rating 2.0: Equity in Action and can be followed over on the FEMA website.