The Federal Emergency Management Agency (FEMA) has fully implemented its flood insurance overhaul as of April 1, 2023, but the National Flood Insurance Program’s (NFIP) new pricing methodology called Risk Rating 2.0 is being challenged by 10 states in court.
“The methodology leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarially sound, equitable, easier to understand, and better reflect a property’s flood risk,” says FEMA.
The lawsuit, however, filed by 10 states, 43 Louisiana parishes, 12 levee districts, and 2 municipalities, alleges that the FEMA failed to consider skyrocketing flood insurance costs generated by its new rating system.
New Orleans Federal Judge to Hear Arguments to Pause Risk 2.0
A federal judge in New Orleans began hearing testimony on Sept. 14, 2023, in the case brought against Risk Rating 2.0 led by Louisiana Attorney General, Jeff Landry and Solicitor General, Liz Murrill.
"At the end of the day, I think a lawsuit was always necessary, because FEMA has flatly refused to fix anything that they have openly acknowledged is broken, and it's frustrating, it's terrifying, for people who face potentially losing their homes," Murrill said. "And we are just beating our heads against a wall with a bunch of bureaucrats in Washington, D.C., who don't care - who have the audacity to claim that this is equity in action. It's the most absurd title for a program that is egregiously harmful to people."
Joining Louisiana in the lawsuit were the states of:
- North Dakota
- South Carolina
Announcing the lawsuit during a press conference in June, Landry called Risk Rating 2.0 “a natural disaster of its own” and said that Louisiana has made “repeated calls for transparency, and repeated cries from our Congressional delegation.”
Insurance Business Magazine reported that:
- According to the lawsuit, federal officials violated the Administrative Procedure Act by implementing changes that were “arbitrary and capricious.”
- As such, it seeks an injunction against the new system and demands that the methodology and data used to determine pricing changes be disclosed.
Secretary of Homeland Security Alejandro Mayorkas revealed in April during a congressional hearing that the federal system for setting flood insurance premiums needs more tweaking than initially expected.
According to a report by The Advocate, Mayorkas told the Homeland Security Committee the approach to the program is being reviewed and hinted at plans to provide grants that will help homeowners and businesses.
“We are reviewing and need to continue to review the Risk Rating 2.0 given the concerns that have been expressed,” he said.
FEMA Began Implementing Risk Rating 2.0 in 2021
The NFIP began implementing “Risk Rating 2.0 – Equity in Action” in phases on Oct. 2021:
- Phase I: On Oct. 1, 2021, new policies were subject to the new rating methodology. Also on Oct. 1, any existing policyholders eligible for renewal were able to begin taking advantage of immediate decreases in their premiums.
- Phase II: All remaining policies renewing on or after April 1, 2022, were renewed into the new rating methodology.
“FEMA is committed to building a culture of preparedness across the nation. Purchasing flood insurance is the first line of defense against flood damage and a step toward a quicker recovery following a flood,” explained FEMA. “Since the 1970s, rates have been predominantly based on relatively static measurements, emphasizing a property’s elevation within a zone on a Flood Insurance Rate Map (FIRM).”
FEMA says the 1970s legacy rating methodology did not incorporate as many flooding variables as Risk Rating 2.0.
“FEMA is building on years of investment in flood hazard information by incorporating private sector data sets, catastrophe models, and evolving actuarial science,” says FEMA.
In addition, FEMA claims the 1970s legacy rating methodology did not account for the cost of rebuilding a home.
“Policyholders with lower-valued homes may have been paying more than their share of the risk while policyholders with higher-valued homes may have been paying less than their share of the risk,” said FEMA. “Risk Rating 2.0 was not just a minor improvement, but a transformational leap forward for the NFIP.”
With Risk Rating 2.0 fully implemented, FEMA says it can use its capabilities 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.
- Distance to a water source along with property characteristics such as elevation and the cost to rebuild.
“Since the implementation of Risk Rating 2.0, FEMA is now able to equitably distribute premiums across all policyholders based on home value and a property’s flood risk, and set rates that are fairer and more equitable,” said FEMA.
GAO Says Premiums Will Need to Nearly Double to Reach Full Risk
A middle ground, perhaps, between the state's lawsuits and FEMA’s backing of Risk Rating 2.0 is the U.S. Government Accountability Office (GAO) report released in July that said the “new rate-setting methodology improves actuarial soundness but highlights the need for broader program reform.”
The report said: “FEMA revamped how it sets premiums in 2021—more closely aligning them with the flood risk of individual properties. However, affordability concerns accompany the premium increases some will experience. We recommended that Congress consider creating a means-based assistance program that's reflected in the federal budget.”
The report notes that FEMA had been increasing premiums for several years prior to implementing Risk Rating 2.0. By December 2022, the median annual premium was $689, but this will need to increase to $1,288 to reach full risk.
“Under Risk Rating 2.0, about one-third of policyholders are already paying full-risk premiums. Many of these policyholders had their premiums reduced upon implementation of Risk Rating 2.0. All others will require higher premiums, including 9 percent who will eventually require increases of more than 300 percent,” said the report. “Further, Gulf Coast states are among those experiencing the largest premium increases. Policies in these states have been among the most underpriced, despite having some of the highest flood risks.”
Estimated premium changes under Risk Rating 2.0, as of December 2022:
- 1 to 49 percent increase: 21 percent.
- 50 to 99 percent increase: 14.3 percent.
- 100 to 199 percent increase: 14.7 percent.
- 200 to 299 percent increase: 6.8 percent.
- 300 percent or more increase: 9.4 percent.
“Instead of paying hundreds for insurance, the Attorney General’s Office believes your premiums could reach the thousands in the near future,” WAFB reported. “Those against Risk Rating 2.0 say it fails to protect policyholders, recognize mitigation efforts, and imposes unaffordable costs which will drive more of you out of the insurance pool.”
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The recommendation(s), advice and contents of this material are provided for informational purposes only and do not purport to address every possible legal obligation, hazard, code violation, loss potential or exception to good practice. Dean & Draper Insurance Agency specifically disclaims any warranty or representation that acceptance of any recommendations or advice contained herein will make any premises, property or operation safe or in compliance with any law or regulation. Under no circumstances should this material or your acceptance of any recommendations or advice contained herein be construed as establishing the existence or availability of any insurance coverage with Dean & Draper Insurance Agency. By providing this information to you, Dean & Draper Insurance Agency does not assume (and specifically disclaims) any duty, undertaking or responsibility to you. The decision to accept or implement any recommendation(s) or advice contained in this material must be made by you.