Flood Insurance

Most Existing Policyholders Will See Their Flood Insurance Costs Increase Under Risk Rating 2.0, but Not by Much

Most Existing Policyholders Will See Their Flood Insurance Costs Increase Under Risk Rating 2.0, but Not by Much

The cost of flood insurance will increase for more than 3.8 million policies, though just 4% of all policies will see the highest increases after FEMA’s new methodology is implemented.
Flood damage to a residential area.
Flood damage to a residential area. Source: Getty Images

The Federal Emergency Management Agency (FEMA) is taking steps to more effectively assess the flood risk that homeowners face. The agency’s National Flood Insurance Program (NFIP) recently released new flood insurance rating procedures that are meant to equitably distribute the cost of insurance for potential flood damage based on the risk a property faces.

FEMA estimates that Risk Rating 2.0 — the new methodology that goes into effect in October — will result in immediate cost reductions for 23% of existing policies across the 50 states and the District of Columbia. While this means that nearly 1.2 million policies will see costs decrease, more than 3.8 million will see rates increase.

It's estimated that just 4% of existing policies across the U.S. will have the highest rate hike — greater than $20 a month or $240 a year. However, because of the geographic factors that influence the cost of flood insurance, some states are more likely to see the highest increases. In fact, more than 10,000 policies each in Florida, Texas, Louisiana, New Jersey and New York will face the highest price increases.

Key findings

FEMA's rate changes promise to set right the problem of policyholders paying rates that don't reflect the true risk they face

Risk Rating 2.0 goes into effect on Oct. 1 and incorporates a wide range of variables to arrive at a more realistic estimate of a community's flood risk.

According to FEMA, Risk Rating 2.0's enhanced flood assessment tools will correct the problem of policyholders with lower-valued properties paying rates that would more accurately reflect the risk a higher-valued home faces.

Before Risk Rating 2.0, the agency primarily evaluated flood risk by using flood zone maps, which communicate the likelihood of an area being inundated by a 100-year flood event. On paper, this translates to a 26% risk of flood damage during the lifetime of a conventional 30-year mortgage.

By moving away from a reliance on flood zone mapping to show a community's flood risk, FEMA can illustrate the unique risk a property faces. Risk Rating 2.0 models a property's risk through a variety of considerations, including:

  • Probable inland flooding
  • Historical storm surges
  • Cost to rebuild the property
  • Historical losses
  • Elevation
  • Natural surroundings and barriers

Despite the fact that many homes will see marginally higher rates for flood insurance after Risk Rating 2.0 goes into effect, existing limits on annual rate increases will still be in effect. This means that most homes won't experience year-over-year price hikes that are more than 18%.

New rates will more accurately reflect risk, with nearly 1.2 million policies seeing immediate discounts — but most people will see rate increases

FEMA breaks down its projections for rate changes across four categories: immediate discounts, increases that are $10 or less a month, increases of $10 to $20 a month and increases of more than $20 a month. Below are the number of in-effect policies that FEMA estimates will be affected across each tier:

Rate change (per month)
Policies affected
Immediate decrease1,161,539
$10 or less3,323,350
Between $10 and $20330,516
Greater than $20192,836

Nationally, 23% of existing policies will decrease in cost as a result of Risk Rating 2.0. Eighty-four percent of policies in Alaska are likely to carry cheaper rates following its implementation, but there are just 2,300 in-effect policies in the state.

Residents of Maryland and Michigan are far more likely to benefit from FEMA's policy change. Sixty-one percent of Maryland's 65,000 flood insurance policies and 54% of Michigan's 20,500 policies will decrease in cost immediately after FEMA's rating changes take place. These three states along with Utah and the District of Columbia are the only areas where more than half of the existing policies will decrease in cost.

Meanwhile, 77% of existing policies across the U.S. will see some level of price increase. The ratio of policies that will be more expensive after Risk Rating 2.0 varies by state. For example, 86% of policies in Texas will have higher prices after October, second only to Hawaii at 87%.

Just 4% of policies nationwide, or nearly 193,000 policies, will see rate increases of greater than $20 a month. In more than half (27) of the states, fewer than 1,000 existing policies will experience the highest price increase. In five states, however, there are more than 10,000 existing policies that FEMA estimates will carry rate increases of at least $20 a month, including in some of the nation's most populated states, such as Florida, Texas and New York.

Of more than 5 million in-effect policies, 77% will see some increase, while 4% will experience a per-month cost increase that's greater than $20.

State
Total policies in effect
Percentage with decrease
Percentage with any increase
Percentage with an increase greater than $20 a month
Florida1,727,90020%80%4%
Texas768,60014%86%3%
Louisiana495,90020%80%3%
New Jersey217,20021%79%5%
California215,00027%73%4%
South Carolina208,60026%74%3%
New York171,10032%68%7%
North Carolina139,80026%74%3%
Virginia104,80045%55%2%
Georgia82,00024%76%2%
Maryland65,00061%39%1%
Hawaii61,40013%87%4%
Show All Rows

Table sorted by largest number of existing policies.

What consumers need to know about flood insurance

Aside from how Risk Rating 2.0 affects the cost of coverage in their areas, consumers should be aware of the limitations of a federally backed policy.

Consumers should be aware that flood insurance from the NFIP normally carries a 30-day waiting period before it takes effect. Between the time a consumer purchases a policy and the date when that policy becomes effective, the policyholder effectively has no coverage from flood damage, as home insurance doesn't offer flood protection. Consumers should purchase coverage from the NFIP ahead of the typical storm season to maximize their protection.

Unlike a policy from the NFIP, private flood coverage carries a shorter waiting period of 10 to 14 days before it goes into effect. While private flood insurance policies are generally (though not always) cheaper and allow for more customization than a federally backed policy, the national availability and catastrophe-tested history of the NFIP could make it more attractive to many consumers — and to mortgage lenders that require flood insurance.

Those with expensive homes who need more coverage may be more inclined to consider a private flood insurance policy. The NFIP allows consumers shopping for residential flood insurance to purchase dwelling coverage worth up to $250,000 and $100,000 of coverage for contents. However, private flood insurance, when available, usually allows policyholders to purchase much higher limits of protection. Consumers may also add $30,000 of compliance coverage to an NFIP policy, which goes to construction that increases a home's resistance to floods.

Methodology

ValuePenguin consolidated the information published by the Federal Emergency Management Agency (FEMA) National Flood Insurance Program (NFIP) regarding the number of policies in effect and those scheduled to see a decrease or increase after the implementation of Risk Rating 2.0. In its Risk Rating profiles, the NFIP sorted policies into four categories based on estimated rate changes:

  • Immediate decreases to the cost of flood insurance
  • Increases that are greater than $0 but no more than $10 a month
  • Increases between $10 and $20 a month
  • Increases that are greater than $20 a month

This study includes rate changes for each of the 50 states and the District of Columbia.