The new rating system corrects inequities and can adapt to the impacts of climate change
WASHINGTON — Today, on the 42nd anniversary of the formation of the Federal Emergency Management Agency (FEMA), Secretary of Homeland Security Alejandro N. Mayorkas released the following statement on Risk Rating 2.0, a bold new update to the National Flood Insurance Program’s pricing methodology. This new rating system is fiscally sound, fixes longstanding inequities in flood insurance pricing, and improves resilience to climate change.
“We are putting equity at the forefront of our work at DHS and making reforms to help our nation confront the pressing challenges caused by climate change,” said Secretary Mayorkas. “Risk Rating 2.0 advances those goals by fixing longstanding inequities in flood insurance pricing and creating a system that is better equipped for the reality of frequent flooding caused by climate change. These updates will improve individual and community resilience, reduce disaster related suffering, and ensure fairness. Risk Rating 2.0 is equity in action, and it is a testament to the hardworking women and men of FEMA.”
Risk Rating 2.0 aligns with the Biden Administration’s priority to deliver bold action to tackle the effects of climate change and eliminate inequities in the delivery of federal programs. The National Flood Insurance Program provides about $1.3 trillion in coverage for more than 5 million policyholders in 22,500 communities across the nation.
Critically, the modernized pricing methodology corrects the current system’s unintentional inequities in which many policyholders with lower-value homes are paying more than they should and policyholders with higher-value homes are paying less than they should. As a result, nearly a quarter of the NFIP’s current policyholders will see a decrease in their premiums under the new pricing structure.
FEMA leveraged cutting-edge technology and devoted thousands of hours to develop the new pricing methodology to ensure equity and accuracy. During the development of the new methodology, FEMA consulted with experts from the U.S. Army Corps of Engineers, U.S. Geological Survey, and the National Oceanic and Atmospheric Administration, along with experts and actuaries from across the insurance industry, to develop and integrate the data and models used for Risk Rating 2.0.
FEMA now has the capability and tools to address rating disparities by incorporating more flood risk variables such as flood frequency, multiple types of flooding, and distance to a water source, and by incorporating property characteristics, such as a home’s elevation and the estimated cost to rebuild, a critical factor that has been an industry standard for years.
FEMA is conscious of the far-reaching economic impacts COVID-19 has had on the nation and existing policyholders and is taking a phased approach to rolling out the new rates beginning on Oct. 1, 2021 for new policies and April 1, 2022 for existing policyholders.
For the latest information on Risk Rating 2.0, visit fema.gov.