Michigan Expects New Flood Insurance Rating System Will Lower Premiums; Coastal States Disagree
While lawmakers from various coastal states are decrying the new flood insurance rating system rolled out by FEMA and the National Flood Insurance Program (NFIP) on Oct. 1, Michigan insurance regulators expect Risk Rating 2.0 to lower flood insurance premiums for many policyholders.
The Michigan Department of Insurance and Financial Services (DIFS) said the NFIP estimates that under its new rating system more than 52% of Michigan flood insurance policies will see savings.
Risk Rating 2.0 represents the first time FEMA has revised its pricing methodology for flood risks since the 1970s. Traditionally, rates for the NFIP “have been predominantly based on relatively static measurements, emphasizing a property’s elevation within a zone on a Flood Insurance Rate Map (FIRM),” FEMA said in a message on its website.
Risk Rating 2.0 is being introduced in two phases. In phase one, which began on Oct. 1, 2021, new policies, as well as policies eligible for renewal on that date, are subject to the new rating methodology, FEMA said. In phase two, policies renewing on or after April 1, 2022, will be issued under Risk Rating 2.0 methodology.
The Michigan DIFS said previous pricing for federal flood insurance was based on a limited number of data sources and did not consider important individual factors, such as a building’s first floor height or the direct distance from a potential flood source. In addition, the previous underwriting process required prospective insurance customers to obtain a flood elevation certificate and survey, which can cost up to $2,000.
Risk Rating 2.0 expands the data sources used in federal flood insurance underwriting, the DIFS said. Michigan regulators note that the new system allows for more accurate pricing based on a property’s individual characteristics and removes the requirement for a flood elevation certificate.
In addition, DIFS said, Risk Rating 2.0 will make flood insurance more equitable, as a property’s replacement cost will now be factored into the premium. This makes lower-valued properties less expensive to insure and prevents the premiums paid on these properties from subsidizing more expensive properties in riskier areas.
The department noted that in addition to federal flood insurance, private flood coverage is available in Michigan from a number of insurers.
Opposing Voices
U.S. senators from some coastal states are predicting “an actuarial disaster” in the future once FEMA’s flood insurance rating system goes into full swing. In a press call on Sept. 30, Louisiana Sen. Bill Cassidy and New Jersey Sen. Bob Menendez called for President Biden to delay the implementation of Risk Rating 2.0.
Cassidy acknowledged the new methodology would go into effect, but, he said, “my personal plea is that the president would tell FEMA not to proceed with Risk Rating 2.0. but to look for alternatives.”
Cassidy and Menendez said their intention is to inspire Congress to act on reform proposals to revamp the flood insurance program. They believe the new rating system, which calls for year-over-year rate increases capped at 18% for at least the next decade will raise rates to a point that they will not be sustainable for policyholders, and therefore the NFIP. Menendez indicated a 9% annual increase would be more appropriate.
Menendez said he supports “revamping our flood insurance rating system to include the most sophisticated data including data on climate change. While I tried to give FEMA space to develop its new rating system and want to be supportive of a process to achieve that, Risk Rating 2.0 as it stands need to be delayed.”
The senators also want Congress to fund mitigation efforts to better protect homeowners from future storms. “For every dollar we spend on mitigation, the government saves six dollars on the back end. Putting the program on a path to solvency,” Menendez said.