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Risk Rating 2.0: What It Is, When it’s Coming,
and What Agents Need to Know

In November 2019, FEMA announced that they would delay the rollout of a major improvement to the National Flood Insurance Program (NFIP) by one year. This means that Risk Rating 2.0 won’t take effect until October 1, 2021.

And this extra time is good news. Given that Risk Rating 2.0 involves the integration of new and existing technology, and will impact all stakeholders within the flood insurance marketplace, there are many questions to be addressed before the rollout begins.

While there are still many unknowns, it’s not too early to help homeowners establish a high-level understanding of how the NFIP’s flood insurance rates will be calculated starting next year.  To help get that process started, here’s what we know about Risk Rating 2.0, how it’s expected to transform NFIP flood insurance policies, and what agents can expect when it rolls out next fall.

What We Know About Risk Rating 2.0

The current methodology for calculating homeowner premiums was established over 50 years ago as part of the National Flood Insurance Act of 1968. Under this methodology, homeowners’ risk is determined by which flood zone from FEMA’s Flood Insurance Rate Map that their home is located within.

Due to climate change and a host of other factors, the NFIP has determined that the current methods for calculating flood risk are no longer an effective way to determine flood insurance rates around the country. Instead of working off of FEMA’s flood maps, Risk Rating 2.0 will base risk ratings off of individual risk factors.

What exactly does this mean? Well, the clearest message we’ve received so far is this: “The new risk rating plan will use easier-to-understand rating characteristics for each property.”

These characteristics include:

  • The distance to the coast or other known flood source
  • The type of flood risk
  • The cost to rebuild

The logic behind the new risk calculations has not yet been fully unveiled, and agents can expect to hear more updates as we head into this winter and next spring. While FEMA has hinted that there may be some rate discounts for homeowners that take on certain flood prevention projects, the full extent of these has not yet been announced.

How Risk Rating 2.0 Will Transform NFIP Flood Insurance Rates

For those living in high-risk and coastal areas, the idea of pegging individual flood insurance rates may sound like bad news, but FEMA has announced that Risk Rating 2.0 will comply with existing statutory caps on premium increases. This move is intended to help soften the transition for those who might otherwise experience a substantial rate hike under the new rating methodology.

The new methodology should also help simplify the process of generating a quote for agents by entrusting risk rate calculation to programmed algorithms that can take into account each individual’s unique factors.

This change to the NFIP program aims to provide:

  • Improved rate transparency for agents and policyholders
  • Reflect a greater variety of flood types in the flood risk formula
  • Incorporate contemporary actuarial practices to ensure risk-based rates

Risk Rating 2.0 will change how homeowners and insurance agents understand the individual risk associated with each property and what insurance coverage will be the best fit.

What Agents Can Expect When Risk Rating 2.0 Rolls Out

We don’t know yet what day one of Risk Rating 2.0 will look like or what agents will need to do when we implement the new methodology, but the good news for agents is that better technology is on the way and Trident will make implementing Risk Rating 2.0 seamless. And as risk rating becomes simpler for your team, it will also become easier to generate and share quotes with homeowners.

Being able to turn around a quote that is tied to tangible factors on the property will help agent’s and homeowner’s establish a better shared understanding of their true flood risk. This, in turn, can help facilitate clearer discussions around what homeowners might be able to do to protect their property from flood damage (and potentially improve their flood insurance rate).

Today, agents should continue to educate and advise policyholders and homeowners about how to prepare for the 2020 hurricane season, which is shaping up to be an “extremely active” year, as scientists predict. While there isn’t much agents can do to prepare homeowners for Risk Rating 2.0 yet, your continued engagement with policyholders is a great step toward mitigating ongoing flood risks.

NFIP Flood Insurance Rates May Change, But Flood Insurance Coverage Won’t

The need for improved flood insurance preparation and coverage is real, as new data from First Street highlights: An astonishing 70 percent of American homeowners are at risk of flooding that isn’t reflected in current FEMA flood maps today.

In tandem with this a recent Harris Poll found only 12 percent of respondents had flood insurance, and nearly three-quarters believed that they didn’t need it. This misperception needs to be changed if American homeowners are going to start investing in the flood insurance coverage they need to weather climate change over the next decade.

We’re optimistic that Risk Rating 2.0 will usher in the tech-forward shift the industry needs. Until its arrival, keep up on the latest ideas to help you improve your policyholders’ education in our video resource library today.

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