Risk Rating 2.0: Adjustments Needed
A consistent comment I have heard over my career is, what do floodplain managers have to do with flood insurance? Even as recently as this past month, I have talked with colleagues at FEMA who work in the Federal Insurance Directorate on the NFIP yet don’t quite understand the tight connection. So I thought I would spend this month’s column explaining why floodplain managers care about flood insurance and share some thoughts about FEMA’s new rating system — Risk Rating 2.0.
Let’s do an exercise. Go to Google and type NFIP and the name of your community. What results do you get? For me, I typed NFIP Union County Ohio and the first 10 search results were links to the website of the county floodplain management office, information about flood maps, media reports, etc. What I didn’t get were listings of insurance agents selling flood insurance in my county. Not a single one. The reality is that over 22,000 communities in the United States are required by law (the National Flood Insurance Act) to adopt and enforce local floodplain management regulations, and designate a local floodplain manager as a condition to participate in the NFIP. Ditto for states.
Local floodplain managers are required to do a lot of things related to the land use regulations side of the NFIP in their codes, but in reality, they are considered the local expert on all matters related to flooding. If the mayor knows somebody with a flood issue, they often direct them to the floodplain manager for help. If a person has a flood insurance problem, they often call … the floodplain manager. In fact, the role of the floodplain manager has evolved into a jack-of-all-trades for flood issues in a community, and that includes flood insurance. Floodplain managers often help property owners figure out how they can reduce flood insurance rates by elevating their buildings, installing flood vents, or even relocating a building out of the floodplain.
Prior to Risk Rating 2.0, we learned to use the flood insurance rating tables to translate flood risk into flood insurance estimates (floodplain managers do not quote exact rates, that isn’t their job) and then help existing homeowners, developers, and others devise solutions to reduce flood insurance cost and flood risk because the rating system worked fairly well in concert with local floodplain regulations. For example, if you elevated to or especially above the Base Flood Elevation, you got a premium discount. We were told by FEMA for decades that new construction in identified special flood hazard areas (SFHAs) was more or less actuarial rated while knowing if you were just outside of that line you were getting a rate much less than the real risk. We had depth-damage curves produced and revised by the US Army Corps of Engineers that showed the clear relationship between flooding depth and building damage. The world made sense, especially in SFHAs. And yet there were some significant flaws in the old rating system, especially outside of SFHAs, as well as pegging the flood insurance subsidy to the date of construction.
Over the past two decades, there has been a steady drumbeat by policy makers and others to make the NFIP more actuarially sound. Social scientists and researchers told us that an important way to communicate risk was to have a hazard insurance rate that truly reflects the risk on the insured property. It’s an idea that ASFPM has long supported. Heck, the NFIP itself shows that premiums being collected do not reflect risk because the program has been stuck servicing a large amount of debt since 2005. Clearly, the old rating system was not adequate either. As Congress reformed the program in 2004 and again in 2012, and 2014, a clear trend and message to FEMA was to get the program more actuarially sound. So, in October 2021, FEMA attempted that very thing with a new flood insurance rating system dubbed Risk Rating 2.0.
Improvements needed for Risk Rating 2.0
As we noted in 2021, ASFPM believes a new rating system is long overdue and that it is important for property owners to understand their true flood risk through an actuarial sound flood insurance rate. We’re also aware that any new system rollout won’t be perfect right from the start. But we’re now about 18 months in and FEMA should have enough data to begin evaluating the new rating system and correcting deficiencies. ASFPM, for our part, has been listening closely to members who are on the front lines, identifying examples where the rating just doesn’t make sense, and working to identify any trends or ways that the new system doesn’t seem to be very good at communicating risk and the corresponding rates. We have a cross-committee workgroup that is meeting regularly with FEMA headquarters to provide this feedback to them and have been forwarding ideas for FEMA to consider.
When we talk of the NFIP, we often talk about it as a four-legged stool: floodplain management, flood mitigation, floodplain mapping, and flood insurance. However, it’s become clear to the floodplain management community that the new rating system has severed those first two legs and as a nation we still haven’t prioritized flood mapping the entire U.S. to better reflect flood risk. And regardless of how many times somebody wants to say that flood insurance is now being rated using modern state-of-the-art methods, an inescapable fact is that, unlike every other insurance approach that exists, flood insurance that is part of the NFIP is a piece of a larger flood risk management program and that consideration must be taken into account.
The among the Risk Rating 2.0 deficiencies we have noted, the two most significant are:
- Elevation of a home or business (which is required under NFIP land use and building standards) is not being adequately credited nor seemingly are other flood hazard mitigation measures that would meet NFIP and local codes.
- There is no way for a floodplain manager to help a home or business owner determine which mix of mitigation measures would translate into reduced flood insurance premiums.
On the second issue, last fall FEMA asked ASFPM to help develop requirements for such a tool and we understand that FEMA has prioritized making such a tool available. On the first issue, it seems there could be some adjustments to the rating system to give more credit to things like elevating to the BFE or higher (which local codes require). Or maybe taking a page from other lines of insurance and give a flat discount like 10% or 20% on rates that meet or exceed local floodplain management requirements (not unlike discounts you get for defensive driving or sprinkler systems in a building). During a plenary session at the National Flood Conference last week, insurance agents on a panel about Risk Rating 2.0 identified the inability to help policy holders understand the mitigation measures that would translate into reduced flood insurance premiums as a significant problem.
The bottom line is that ASFPM supports the concept of full risk rates for flood insurance premiums, with the following provisions:
- It must be accompanied by a means tested affordability program. This is something Congress must do and should do immediately.
- Transparency in how rates are determined for property owners and FPAs. The mitigation discount/scenario tool could be very helpful with this. We’d also welcome any white papers, studies, and fact sheets that help shed light on the new rating system and answer questions such as why depth damage curves like those produced by the Corps of Engineers don’t seem to matter as much anymore or what is the controlling frequency flood for determining flood insurance rates and why. Such information would not only help bring credibility to the new system but also would help us understand how we might use the new rating system to help update land-use and building standards. For example, if distance to a watercourse is a variable now, what is the distance needed to maximize the impact on lowering flood insurance rates? Might that be a reason for a setback or buffer standard under updated land-use/building standards?
- The insurance process supports the other three legs of NFIP; mapping, regulations and mitigation. The NFIP is a unique and comprehensive program to reduce flood risk in the nation. There is really no other program like it, and by law there are several purposes and objectives for the program. A rating system (premiums) that incentivizes participation in mitigation programs and also rewards compliance with NFIP minimum standards as well as going beyond those standards is essential to a strong NFIP. In areas where we don’t have any flood hazard information (only 1.2 million of 3.5 million miles of streams, rivers and coastlines are mapped), then a top priority of the program is to map the remaining areas as soon as possible using fast and accurate approaches like Base Level Engineering.
ASFPM believes in an approach that includes both FEMA and the insurance industry to better understand the perspective of floodplain managers. Conversely, we don’t believe that lawsuits, or going back to the previous rating scheme will ultimately lead to improved flood risk management in the nation. For a strong and enduring NFIP, there needs to be connected and complementary approaches to mapping, insurance, floodplain management, and flood hazard mitigation — today and into the future.
