Big Changes Ahead For Flood Insurance

After 50 years of maintaining the same pricing methodology for flood insurance, FEMA has unveiled the latest rating structure which took effect on new policies on October 1, 2021 and the rest on April 1, 2022. 

The new flood insurance rating structure, known as Risk Rating 2.0, attempts to align the National Flood Insurance Program (NFIP) with the actual flood risk of the structure and associated community. 

Historically, FEMA priced flood insurance on the elevation of a structure in a specified flood zone located on a FEMA Flood Insurance Rate Map (FIRM) with a heft subsidy provided by the Federal government leading to a $20.5 billion dollar debt.

Risk Rating 2.0 attempts to place the onus on the property owner and community to increase the resilience of the structure and community, therefore, reducing the flood risk and associated flood insurance rates.  

While FEMA has provided several studies on the impact of Risk Rating 2.0 on future flood insurance pricing, the studies have combined all building types including single family residential, multi-family residential and commercial.  It is unclear the full impact of the new rating structure on commercial and multi-family residential property owners.

To adequately respond to the new rating structure, a full understanding of your portfolio’s flood risk is more important than ever. FEMA’s flood insurance premiums will be based on specific features, or variables, of the individual building including:

• Distance from the coast
• Type of flooding
• Flood frequency
• Structure foundation type 
• First-floor type and height
• Structure replacement cost
• Foundation Type
• MEP equipment location above the first floor

Policyholders can receive discounts for mitigation efforts, including, but not limited to:

• Elevating a property
• Elevating electrical and mechanical equipment above the lowest floor
• Installing flood openings (which equalize pressure in the event of a flood and reduce structural damage) 

Archipelago’s unique schema provides a snapshot of the flood risk and mitigation of structure which may assist in anticipating the change in premium.  The policy holder will provide information about the structure which will help to determine their flood insurance premium. The Archipelago schema conveniently captures many of the variables associated with a building used in this determination.  These variables include, but are not limited to:

• Building Elevation
• Distance to coast
• Occupancy
• Floor of interest
• Foundation Type
• Presence of basement
• First-floor height
• MEP equipment location
• Valuation Information

While FEMA will still rely, in part, on the flood maps, Risk Rating 2.0 allows for building owners to realize flood insurance savings for resilience actions such as elevating their MEP equipment or installing flood openings.  For additional information, please visit https://www.fema.gov/flood-insurance/risk-rating.