Florida set for some of the steepest NFIP flood insurance rate rises

Florida is set to experience some of the steepest increases in rates and pricing of flood insurance coverage under the National Flood Insurance Program (NFIP) after the release of FEMA’s new Risk Rating 2.0 system comes into effect over the next year.

Already facing rising insurance rates due to hurricane and severe weather impacts, Florida’s homeowners, renters and businesses are now set to shoulder steep increases in flood insurance costs.

FEMA released what it calls a “21st century rating system,” which is named Risk Rating 2.0—Equity in Action, and is designed to provide actuarially sound flood insurance rates that should be more equitable, while also being easier for policyholders to understand.

FEMA says the new flood insurance rating rubric will transforms its pricing methodology that has not been updated in 50 years, thanks to the use of improved technology and FEMA’s enhanced understanding of flood risk.

“The new pricing methodology is the right thing to do. It mitigates risk, delivers equitable rates and advances the Agency’s goal to reduce suffering after flooding disasters,” explained David Maurstad, senior executive of FEMA’s National Flood Insurance Program. “Equity in Action is the generational change we need to spur action now in the face of changing climate conditions, build individual and community resilience, and deliver on the Biden Administration’s priority of providing equitable programs for all.”

The National Flood Insurance Program (NFIP) provides around $1.3 trillion in flood insurance coverage for more than 5 million policyholders in 22,500 communities across the United States.

So a generational change in how flood risk is priced stands to have significant effects, at least in some regions.

Observers expect the highest flood insurance rate increases will affect coastal homeowners and those in flood prone zones, with high-value regions such as Florida set to be particularly impacted.

For the most exposed properties, annual flood insurance costs under the NFIP’s Risk rating 2.0 could rise by more than US $240, with roughly 4% of policyholders (estimated to be over 200,000) expected to face price rises higher than this.

Premiums will now be based on a number of factors, such as property value, distance from the ocean and the risk of rainfall related flooding, rather than just the previous rubric of the property’s elevation within a flood zone.

The old system, of flood zone and map based pricing, was seen to subsidise some dwellers in coastal areas and those at high-risk of flooding, where as the new Risk Rating 2.0 is designed to be more equitable, but as a result will load higher costs onto some regions where property insurance is already very expensive, like Florida.

The new rating system means even higher costs for Florida’s coastal homeowners, something they are going to have to absorb from the private insurance industry as well, if they want to stay located in regions exposed to coastal storms, surges and floods.

Rates are expected to keep rising as well, with increases expected every year until flood insurance premiums are deemed risk commensurate.

The NFIP said it could take 5 years for half of their policies to be correctly priced, while up to 90% could be properly priced within a decade.

The ramifications for the private insurance industry, as well as for the reinsurance sector, could also be significant.

Rising flood insurance premiums over as long as a decade will drive private property insurance rates up as well, particularly those that bundle flood coverage into the package policy.

With flood rates aiming to reach a risk commensurate level, so too should other peril specific components of broader property insurance.

Florida has already been heading in this direction, as insurers try to get paid for the social inflationary risk they face, as well as the catastrophe risk components of coverage they offer.

For the reinsurance sector, there is a chance FEMA continues to buy increasing amounts of flood reinsurance, as the premium value flowing through the NFIP increases with this new rating guide.

That could also lead to FEMA tapping the capital markets with catastrophe bonds for flood reinsurance protection even more as well.

FEMA’s new pricing sends a signal that, in order to be covered, property owners in catastrophe exposed zones are going to have to pay rates commensurate with the levels of risk they are exposed to. Something we expect to see more broadly adopted and a factor that is already behind a lot of the firming of both insurance and reinsurance rates in recent years.