“If you can see water, your rates are going up.”
In a nutshell, that’s what implementation of FEMA’s new Risk Rating 2.0 methodology means for property owners in Louisiana who have flood coverage in the National Flood Insurance Program.
Those are the words of Gregg Porter spoken during his presentation titled Flood Program Overview: NFIP Then and Now on Oct. 28 at the IIABL Fall Conference in Shreveport.
“Risk Rating 2.0 will have a dramatic impact on flood insurance,” IIABL CEO Jeff Albright said in introducing Porter to the agents assembled at the Hilton Shreveport for three hours of flood continuing education credit.
The bottom line is that Risk Rating 2.0 will impact the housing market, particularly lake houses and beach homes, Porter said.
Porter offered a history of the NFIP and how it got to where it is today from its inception in 1968 prior to which flood control consisted of dams, levees and seawalls.
When lawmakers passed legislation creating the program, Congress had twin goals of maintaining a nationwide flood insurance program and encouraging mitigation.
In 1973, legislation mandated that lenders require flood insurance on loans secured by property in high-risk flood areas. In 1983, the Write Your Own Program was created to allow property/casualty carriers to participate in writing and servicing flood insurance. In 1994, the focus on lender compliance was increased, and in 2004 legislation established a minimum flood insurance training and education requirement for insurance professionals. More recently came the Biggert-Waters Reform Act of 2012, followed by the Homeowners Flood Insurance Affordability Act in 2014 which restored grandfathering and limited rate increases.
Now there is Risk Rating 2.0 which has policyholders, their insurance agents and real estate agents and brokers as distraught as Biggert-Waters did in 2012 prior to legislation amending Biggert-Waters in 2014, 2015 and 2016.
Porter explained that effective Oct. 1, new policies became subject to the new rating methodology. All existing policies must renew at Risk Rating 2.0 rates after April 1, 2022.
“Late in the first or second quarter (of 2022) we should see stabilization in the market,” Porter said.
Instead of using maps for rating by zone, according to Porter, FEMA will begin using geo-coding, drones, radar and other technology to arrive at rates for each structure separately. No longer will whole neighborhoods be rated similarly.
According to FEMA’s website, FEMA has the capability and tools to address rating disparities by incorporating more flood risk variables. These include flood frequency, multiple flood types – river overflow, storm surge, coastal erosion and heavy rainfall – and distance to a water source along with property characteristics, such as elevation and the cost to rebuild.
Even though FEMA touts its ability to use technology to address rating disparities, Porter said he is aware of a condo in New York that was paying $93,000 for its flood insurance; its premium went down to $6,000 under Risk Rating 2.0.
In addition, there is the case one agent described in which two homes sat side by side, one valued at $1 million and the other at $500,000, and the premium was more for the $1 million property even though NFIP’s exposure was the maximum $250,000 for each home.
FEMA says that in Louisiana 20 percent of current policyholders, or 101,174 policies, will see immediate premium decreases; 70 percent, or 343,246 policies, will see on average $0.0 to $10 per month increases; 7.0 percent, 34,352 policies, will see $10 to $20 increases per month, and another 3.0 percent, or 17,159 policies, will see on average a $20 or more per month increase. Premium increases will be subject to the 18 percent per year cap set by Congress for most policies, according to FEMA.
FEMA does not elaborate on which policies won’t be subject to the cap.
According to a FEMA pie graph, currently, 265,867 flood policies, more than half of the total number of policies in Louisiana, are preferred risk policies.
Preferred Risk policies are no longer available, ending Oct. 1, Porter said.
On its website, FEMA said it will continue to use Flood Insurance Rate Maps (FIRM) for mandatory purchase and floodplain management. “FEMA’s flood map data informs the catastrophe models used in the development of rates under Risk Rating 2.0,” the website explains.
“Lenders will still use zones, but not for rating,” Porter said.
FEMA also informs that premium discounts will still be offered to eligible policyholders. FEMA will continue to offer premium discounts for pre-FIRM subsidized and newly mapped properties. Policyholders will still be able to transfer their discount to a new owner by assigning their flood insurance policy when their property changes ownership.
Discounts to policyholders in communities which participate in the Community Rating System will continue. Communities will continue to earn NFIP rate discounts of 5-45 percent based on the community rating classification.
“The Community Rating System provides incentives to a community for (mitigation) activities over the minimum requirements,” Porter told agents.
The elevation certificate requirement for new construction is gone, Porter said, but he advised keeping the elevation certificates as they could help decrease the rates.
According to Porter, NFIP policyholders can use increased cost of compliance coverage, Coverage D, to access up to $30,000 to help cover the cost of elevating, relocating or demolishing substantially damaged structures. He explained that there are hurdles to get the money.
For the structure to qualify as being substantially damaged, the total cost of repairs must be 50 percent or more of the structure’s pre-flood market value.
Some property is ineligible for NFIP flood insurance coverage. Porter cited some examples, including buildings partially underground, buildings containing chemicals or liquid, buildings entirely over water, buildings used for manufacture or distribution of controlled substances, boat repair dock, boat storage over water, campers, tennis or golf bubbles, travel trailers, and an auto or motorcycle assembled or unassembled.
Porter added to the list: land, trees, shrubs, livestock and crops.
According to FEMA, also not covered are:
-Temporary housing and additional living expenses incurred while the covered building is being repaired or is unable to be occupied;
-Property outside of an insured building, for example, landscaping, wells, septic systems, decks and patios, fences, seawalls, hot tubs and swimming pools;
-Financial losses caused by business interruption;
-Currency, precious metals, stock certificates and other valuable papers;
-Cars and most self-propelled vehicles, including their parts, and
-Personal property kept in basements.