By Elly Leonida, FVP Operations Manager
It’s been a little over a year now that FEMA has fully implemented the new National Flood Insurance Program’s (NFIP) pricing approach, Risk Rating 2.0. As we mentioned in our last blog, Risk Rating 2.0 marks a fundamental shift from the previous flood insurance rating methodology. This updated approach aims to provide more accurate pricing that reflects individual property risks more precisely. Unlike the previous system that primarily relied on static measurements, flood zone designations and elevation maps, Risk Rating 2.0 takes into account several additional variables, including:
- Property-specific characteristics: Factors such as the distance to water sources, types of flood risks (riverine, storm surge, coastal, etc.), flood frequency, and property characteristics (e.g., elevation of the lowest floor)
- Actuarial data and technology: Private sector data sets, catastrophe models and rebuilding costs that allow for a more nuanced assessment
The thought behind this new pricing model is that FEMA can equitably distribute premiums across policyholders based on home value and flood risk, resulting in fairer and more accurate rates.
However, these increases have significantly impacted consumers. In a survey conducted in Q4 of 2023 by Fannie Mae, 56% of respondents with a separate flood insurance policy said their premium had increased. 24% of respondents said flood insurance is not very or not at all affordable. The survey also showed respondents were increasingly concerned with possible reductions to their homes’ value if their residence became designated as a high-risk flood zone.
FEMA data shows that the homeowners who have been impacted the most from the insurance change have been predominately in coastal states – Florida, California, Louisiana, etc. However, some non-coastal zip codes in Kentucky, Ohio and Texas have also seen double and even triple digit increases, as well. These spikes in flood insurance (and homeowners) premiums have led some homeowners to decide to drop their insurance all together or seek private flood insurance through third-party vendors, if eligible.
In addition to Risk Rating 2.0, FEMA has proposed the Standard Flood Insurance Policy (SFIP) Homeowner Flood Form SFIP, which is designed to improve the customer experience and simplify the process for homeowners. The proposed form aims to reduce barriers to flood insurance adoption and enhance transparency and clarity regarding coverage details, deductibles, and exclusions. The form allows homeowners of one-to-four family residences (which make up the majority of NFIP’s policyholders) to consider their specific flood risk at the point of sale and customize their coverage
Key highlights include:
- Clearer Coverage Information: Simplified language and detailed explanations help homeowners better understand what their flood insurance policy covers.
- Enhanced Disclosures: Important terms and conditions are prominently displayed, reducing ambiguity and ensuring homeowners are fully informed about their policy.
Along with the simplified form, FEMA is also proposing five new endorsements that allow policyholders to modify their coverage::
- Increase cost of compliance coverage
- Actual cash value loss settlement
- Temporary housing expense coverage
- Basement coverage
- Builder’s risk
The evolution of FEMA’s NFIP through Risk Rating 2.0 and the SFIP Homeowner Flood Form represents a positive step towards enhancing flood insurance affordability, accuracy, and transparency. As these changes take effect, mortgage servicers play a pivotal role in guiding homeowners through the transition and ensuring seamless compliance with updated regulatory standards.
At LERETA, we are committed to keeping you informed about regulatory changes that impact mortgage servicing. For more information on how LERETA can support your flood determination and flood monitoring needs, please Elly directly.
