Flood insurance rates are rising. In an effort to buoy the federally funded program that's sinking in debt, the National Flood Insurance Program (NFIP) raised premiums on new and renewed policies by 11.3% on average after April 1, 2020. Rates for policies classified as Preferred Risk Policies (PRPs) increased by 15% on average at the beginning of 2021.
The premium increases policyholders experienced in 2020 and will continue to experience throughout 2021, as the NFIP improves its risk assessment model and works to correct underpriced policies, are one result of the NFIP's mounting debt. In 2017, Congress erased $16 billion of the program's debt so that it could pay claims for Hurricanes Harvey, Irma and Maria. However, as strong storm seasons have followed since 2017, the NFIP now reports a debt to the U.S. Treasury of $20.5 billion.
Who is affected most by the rate hike?
The NFIP's premium increases will affect policyholders of all risk classes nationwide. However, 60% of the flood insurance policies are carried by homeowners in just three states: Florida, Louisiana and Texas.
The largest rate hike affected Pre-Flood Insurance Rate Map (Pre-FIRM) subsidized policies. This rate increase went into effect in April 2020. The Pre-FIRM subsidized policies with the largest premium increases are:
- Nonprimary residences
- Business policies
- Severe Repetitive Loss (SRL) properties
- Substantially damaged/improved properties
Premiums increased for these properties by 25%. The NFIP states that the rates for policies that insure these types of homes must increase by 25% each year until they reach levels that adequately reflect the level of risk. In fact, all Pre-FIRM subsidized policies must increase by at least 5% each year, according to the agency.
Pre-FIRM policyholders aren't the only property owners who will have to pay more for their flood insurance, though. The NFIP needs to bolster the program nationally to sustainably protect all property owners at risk of inland flooding. That means all other risk classes could see a rate increase of up to 18% per policy.
The NFIP estimates that the average premium will increase from $873 to $972. Adding surcharges and fees, the average property owner can expect to pay $1,062 for their flood insurance policy this year.
Premium increases in 2020
Premium rate increase
|Pre-FIRM subsidized policies
|All other Pre-FIRM subsidized policies
|Post-FIRM V zones
|A99 and AR zones not eligible to receive PRP premiums
|Post-FIRM A1–A30 and AE zones
|AO, AH, AOB and AHB zones
|Unnumbered A zones
Which policies are targeted by 2021 increases?
Unlike the rate increases that went into effect in April 2020, the ones that began at the start of 2021 affect Preferred Risk Policies, properties in A zones that are eligible for PRP premiums and properties that have been newly mapped into a Special Flood Hazard Area (SFHA) — zones where flood insurance is mandatory. Rates in these zones rose by:
Premium rate increase
|Preferred Risk Policies (PRPs)
|A99 and AR zone policies eligible for PRP premiums
|Properties newly mapped into an SFHA
PRPs — as well as A99 and AR zone policies that qualify for PRP premiums — saw a rate increase of 15% at the start of the year. Policies in regions with new or recently updated flood maps will receive PRP rates for the first year after the effective date of the updated map. However, following that year, newly mapped policies will receive an annual rate increase of 15% until they reach flood-risk rates.
How will Risk Rating 2.0 affect flood insurance rates in the future?
While the NFIP expects Risk Rating 2.0 to raise rates, premiums are still prohibited from increasing for individual policyholders by more than 18% per year, unless exceptions apply.
The NFIP will change the way that it evaluates flood risk in October 2021. The program, known as Risk Rating 2.0, will incorporate a new rating methodology to better assess a property's flood risk. Accordingly, as a property is found to be at a greater than previously perceived risk of flood damage, rates will rise to better represent that risk.
Risk Rating 2.0 will better communicate rating characteristics for properties, including distance to a flooding source, different types of flood risk an area faces and the cost to rebuild a home. This is an effort by the NFIP to get away from its reliance on representing flood risk through the 1%-annual-chance event.
As the NFIP becomes better at assessing risk and selling policies at rates that reflect that risk, it's likely that many properties could see high premiums. The NFIP states that any rate increases that result from Risk Rating 2.0 will align with current price-increase caps, in order to prevent significant yearly spikes in cost. Those caps and their exemptions are listed below:
Type of flood insurance policy
Maximum rate increase
|Pre-FIRM subsidized policies
|Nonprimary residential properties
|Severe repetitive loss properties
|Heavily damaged or substantially improved properties
|All other properties within a single risk classification*
How should property owners respond to rising flood insurance rates?
Homeowners in regions with a moderate to severe flood risk should continue purchasing coverage. There are two potential ways you could lessen the blow from rate hikes. You may qualify for a discount if you bundle your flood and home insurance policies under the same homeowners insurance company. Alternatively, private flood insurance companies, such as TypTap or Florida Peninsula, may offer lower rates than you would get from the federal program.
Property owners in coastal states are not the only ones at risk of flooding, either. Almost 25% of flood insurance claims come from low- to moderate-risk areas, according to the Federal Emergency Management Agency (FEMA), and these regions receive a third of all federal disaster assistance for flooding.