In an attempt to get flood insurance producers up to speed on Risk Rating 2.0 Equity in Action, the Federal Emergency Management Agency presented a webinar on Nov. 30 targeting insurance professionals. The webinar included information on what led to the transformation of Risk Rating 2.0, the NFIP stats, what has and has not changed, and the transition of current policies.

The FEMA employees who presented the webinar – Lisa Baker, Melanie Graham and Shawn Tinsley – led off by telling their listeners that the information they provided in their power point presentation is current as of Nov. 30 and is subject to change.

In trumpeting Risk Rating 2.0, Graham said the new rating will reflect more types of flood risks in the rates, provide logical rates that use easier to understand rating characteristics and simplify and standardize the quoting process.

Currently the National Flood Insurance Program has approximately five million policies with $1.3 trillion in coverage, and 22,525 communities participating in NFIP. Of the five million, 3.4 million are single family home policies, 10 percent of which are pre-FIRM. There are 1.7 million preferred risk policies, 374,181 pre-FIRM subsidized policies and 993,192 full risk, actuarially rated policies. There are 165,431 grandfathered policies, 170,845 newly mapped and 12,289 high risk coastal zone policies.

Claims spiked in 2005 (nearly $18 billion in losses), 2012 (nearly $10 billion) and 2017 (approximately $9 billion), according to FEMA’s power point. In 2005 losses were more than eight times the premium income and at least double the premium income in 2012 and 2017.

Flood producers were reminded that the new Risk Rating 2.0 began on Oct. 1 for all new business. For renewals the Risk Rating 2.0 kicks in on April 1. For policies renewing between Oct. 1 and March 31, renewal may be under the legacy rating methodology or RR 2.0 methodology, whichever is the best deal for policyholders.

On Sept. 1, FEMA released final guidance documents.

Rating variables changed

Tinsley told producers that under the legacy rating system the rating variables consisted of the flood insurance rate map zones, base flood elevation, foundation type and structural elevation (special flood hazard area only).

The rating variables under the new pricing system will include distance to flood source and flood type, building occupancy, construction and foundation type, replacement cost which is new for all property, ground elevation, first floor height, number of floors and prior claims.

Tinsley pointed out that the base flood elevation and flood zone maps will no longer be used as rating variables. They will be used for flood plain management.

Additional data sources will be integrated by FEMA to better quantify the risk to the structure. This will include additional data sets and will be automated.

The replacement cost tool will be used for single family homes, residential manufactured/mobile homes, residential units and two-to-four-family buildings. The replacement cost tool will not be used for other residential buildings, residential condo buildings (RCBAP), non-residential buildings and other non-residential types of buildings.

Rating tables will no longer be used. Rates will be calculated using an algorithm, and elevations will be considered for all properties.

Relative to distance to flooding source and type of flooding, the new pricing methodology will consider inland, storm surge, tsunami, coastal erosion and great lakes that are likely to impact the structure. The source and type of flooding are determined automatically using geospatial information (GIS) data based on the property location entered by the agent.

The building occupancy variable looks at whether the structure is a single family home, residential mobile home/manufactured home, residential unit, two-to-four-family building, other residential, residential condo building or non-residential.

The construction type variable considers whether the residence is frame with wood or metal frame walls; masonry with the first floor above ground level constructed with masonry, including brick or concrete walls for the full story, or other with the first floor above ground level constructed of materials other than wood or metal frame or masonry walls for the full story.

Foundation types may be slab-on-grade (non-elevated), basement (non-elevated) or crawlspace (elevated).

Foundation types may be elevated without enclosure on post, pile or pier; elevated with enclosure on post, pile or pier or elevated with enclosure not post, pile or pier.

The elevation of the first floor of the structure replaces the elevation difference in the legacy methodology. There are two ways to determine the first floor height for a property: FEMA will determine a first floor height value using application information and various datasets, or alternatively, an elevation certificate, which is no longer required for rating, can be used to determine the structure’s first-floor elevation.

The presenter noted that the elevation certificate may still be required to comply with local floodplain management regulations.

Tinsley urged insureds to retain their flood elevation certificates as they may enable the property to qualify for a better rate.

The number of floors rating variable will no longer include basements, enclosures, crawlspaces and attics if used for storage.

An important change for condominiums is that a unit’s floor will now be determined by the actual floor on which it is located.

Prior claims history will not be included in the initial rate calculation, but the prior claims variable will be applied at renewal of the policy after the first loss under the new rating methodology and will be used in a rolling 20-year period. For those properties with severe repetitive losses, a surcharge still will be included in the premium until the property has its first loss under the new pricing methodology, whereupon prior claims history will be used to rate the property. However, increased cost of compliance payments or claims closed without payment are excluded losses.

As explained by Tinsley, the initial claim under the new methodology is not counted, but will trigger the use of claims history.

Tinsley noted that claims history follows the property, not the owner of the property.

A broader range of flood frequencies is considered under the new pricing methodology. Examples cited were catastrophe modeling and urban flooding. Fees and surcharges that apply to all policies are the reserve fund assessment of 18 percent, HFIAA (Homeowners Flood Insurance Affordability Act) surcharge, federal policy fee of $50 and probation surcharge, if applicable.

Statutory discounts, mitigation credits

Except for emergency status, statutory discounts will gradually phase out until the property reaches full risk rate. Also, homeowners may lose their discounts if they allow their policies to lapse.

The new pricing methodology applies the community rating system discounts uniformly in qualifying communities regardless of whether the structure is inside or outside the Special Flood Hazard area. The discount is a flat percentage based on the CRS class, with no difference for flood zone.

The rating engine will apply a discount for policyholders with machinery and equipment elevated to at least the elevation of the floor above the building’s first floor. Agents will self-certify the position of the machinery and equipment. The list of eligible machinery and equipment will be listed in the flood insurance manual.

The rating engine will apply a discount to the policy for buildings in any flood zone with proper openings in the enclosure (vents). The flood insurance application will need to reflect the vents in order to receive the discount. A minimum of at least two openings on at least two exterior walls are required for the discount. The vents must have a total net area of not less than one square inch for every square foot of enclosure. Bottoms of the openings must be no higher than one foot above the higher of the exterior or interior grade.

Flood proofing is acceptable as an alternative to elevating a building at or above the base flood elevation. Proper documentation is required and the property must meet eligibility requirements.

What is going away

Grandfathering is going away. Policies will transition to full risk premium, subject to statutory caps. Graham noted that fewer than five percent of policies are grandfathered.

The 1.7 million preferred risk policies are going away. Those policies will transition on a glide path, subject to caps, to a full risk premium. Also going away is the Mortgage Portfolio Protection Program and Submit for Rates availability.

What has not changed

The mandatory purchase requirement, floodplain management, statutory caps on annual individual rate increases (18 percent per year), building/contents limits, increased cost of compliance, underwriting forms and assignment of policies to new property owners have not changed, Graham told webinar participants.

Flood insurance will still be required for properties in special flood hazard areas as designated by flood insurance rate maps. The 30-day waiting period will still be waived at loan inception.

Relative to flood plain management, community compliance has not changed and the Letter of Map Amendment and Letter of Map Revision will still exist. Flood insurance rate maps will still be used for flood plain management.

The application, general change endorsement and cancellation forms will be used the same way as they currently are. The forms will be updated under RR 2.0. The policy forms for dwelling, general property and RCBAP are not changing.

Policies can still be assigned to a new building owner, Graham said. This is important under RR 2.0 specifically because it allows the glide path to transfer to the new building owner.

Transition of policies

With the implementation of the new pricing methodology, any premium changes will go into effect at renewal. At renewal the preferred risk policyholders and newly mapped policyholders will be able to change their coverage amounts and increase their deductibles. Unless premium is paid within the 30-day grace period, a lapse in coverage occurs and the policy renews at full risk rate.