The Federal Emergency Management Agency, which administers the government's National Flood Insurance Program (NFIP), has unveiled a new and vastly altered rate structure for its roughly 5 million policyholders nationwide. Under the plan, which became effective on Oct. 1, 2021, an estimated 77% of policyholders will see their premiums increase, while 23% can expect decreases, a FEMA analysis shows. Here is what you need to know.

Key Takeaways

  • FEMA's revamped federal flood insurance rate system took effect Oct. 1, bringing historic changes to longstanding ways of figuring premiums.
  • High-value homes in the highest-risk areas would experience the largest increases, while low-value properties in less flood-prone areas should see price decreases.
  • New policies are now subject to the new rate structure, while existing policies that renew on or after April 1, 2022 will see the rate changes.

High-Risk Property Owners Should Brace for Hikes

FEMA projects that in the first year, 66% of policyholders will see increases of up to $10 a month, 7% will see increases of $10 to $20, and 4% will face increases of more than $20. High-value homes in the highest-risk areas are expected to experience the largest increases.

An independent analysis earlier this year by nonprofit research group First Street Foundation found the average rate would need to increase by 4.5 times to cover the risk on the nation’s most flood-prone homes in 2021, and 7.2 times to cover the growing risk by 2051.

While the greatest flood risk is concentrated among a relatively small number of properties, First Street Foundation’s communications director, Michael Lopes, told Investopedia he presumes that for properties in FEMA’s "more than $20" category, "the increase could be very large, probably totaling several hundred or even thousands of dollars per year."

That observation rings true with media reports in recent days of new policyholder and insurance agent experiences, reflecting steep hikes in premiums.

However, FEMA data provided to Investopedia indicates that policyholders currently paying the most under the old method will pay considerably less under the new Risk Rating 2.0. The maximum cost of a single-family home policy would be $12,125 now (including premium, fees, and surcharges) vs. $45,925 previously.

Addressing Unfairness in Policy Pricing

FEMA first unveiled details of its planned flood insurance revamp, called Risk Rating 2.0, in April. The initiative represents a major effort to more accurately reflect the flood risk that individual properties face and the biggest change in the way the agency calculates flood insurance premiums since the program's inception in 1968.

Rather than figuring premiums based on flood zone maps, premiums will now be based on features of individual properties, such as proximity to coastlines or rivers, type of foundation, and present-day cost of rebuilding.

The goal is to remedy longstanding inequities in how pricing was set, says David Maurstad, FEMA's senior executive for the NFIP, who acknowledged that "some of our policyholders have been unjustly subsidizing other policyholders."

Under the new rate-setting system, "policyholders with lower-value homes that have been paying more than they should will no longer bear the cost for the policyholders with higher-value homes who have been paying less than they should," Maurstad said during a recent press call.

Important

Flood insurance covers water-related damage to a home that a regular homeowners policy does not.

How the Program Will Phase In

FEMA manages the National Flood Insurance Program through a network of about 60 insurance companies and NFIP Direct

For existing flood insurance policies, the changes won't kick in for renewals until April 1, 2022, with annual increases capped at 18% by law until they reach the full rate—generally over a 10- to 15-year glide path. Existing policyholders who are eligible for renewal and for lower rates, however, can claim immediate discounts beginning Oct. 1. New policies beginning Oct. 1 will be subject to the new method.

Existing policyholders and anyone shopping for a policy can get a summary of how rates will rise or fall by state, county, and ZIP code under the new system by searching FEMA's policy and location profiles.

Homeowners can also assess their property's flood risk by using FloodFactor.com, a First Street Foundation tool that risk-scores 142 million homes and properties in the U.S. over the course of a 30-year mortgage.