As we experience more extreme weather and floods increase across the country, the National Flood Insurance Program is poised to make a shift in how it prices its policies that is expected to have a drastic effect on premiums for many homeowners.
The NFIP's new premium-setting system, called Risk Rating 2.0, will change how the government-run insurer calculates premium rates to better reflect the risk of each individual household.
The new regimen, set to take effect in October 2021, comes as new research has concluded that the model that the Federal Emergency Management Agency uses to map flood risk across the country greatly underestimates the risk.
That means that many homes in flood areas may be at increased exposure than previously thought, and that the insurance premiums many property owners are charged are not enough to account for the steadily increasing flood risk due to increasingly volatile weather.
As a result, hundreds of thousands of homeowners could see their flood insurance rates jump this fall, according to a study by First Street Foundation, which models flood risk. In the many high-risk areas of the country, rates could skyrocket, with rates for properties in those areas needing to increase more than $10,000 a year to account for the true risk they face.
Aside from these expected rate increases, the study found that hundreds of thousands of homes are likely going uninsured because they are not accounted for in FEMA's Special Flood Hazard Areas, which are areas that have at least a 1% chance of being flooded in any given year.
FEMA creates these maps so that homeowners know what they are getting into when they buy a new property. Also, under federal law, homeowners that have a federally backed mortgage and reside within an SFHA must secure flood insurance.
Uninsured for flood damage
As stated above, many people live in areas that are not in an SFHA but still have a 1% chance or more of flooding. But since they are not in an official SFHA, they likely have not taken out flood insurance, meaning that they would have to pay for repairs and replacement costs out of pocket if a flood hit their property.
Homeowner's insurance typically does not cover flooding.
Areas with the biggest risk underestimates include Florida, New Jersey and South Carolina, as well as parts of Texas, Washington and California.
"Because a great deal of flood risks exists outside of Federal Emergency Management Agency's designated Special Flood Hazard Areas, this research reveals a vastly expanded mapping of economic risk associated with flood risk and demonstrates … underestimations of financial and personal risk to property owners," the report states.
The First Street report predicts that flood risk will grow in currently flood-prone areas, as well as in areas that have typically not been at risk of a 100-year flood event. It made these conclusions using models that predict climate changes into the future.
Currently, the average estimated annual total loss for the 5.7 million properties in the U.S. that have any flood risk is $20.3 billion. That's an average loss of $3,548 per property.
Using climate projections for 30 years into the future - or 2051 - the estimated annual flood loss for the country will be $34 billion, or $5,913 per property.
Compare that to the 4.3 million U.S. properties currently considered to have "substantial" flood risk. Currently the annual loss for those properties is $20 billion, with an average $4,694 per property.
Using those same climate projections, in 2051 the annual aggregate flood damage for those properties will be an estimated $32.3 billion, with an average estimated annual loss of $7,563 per property.
What you can do
If you do not currently have flood insurance but are concerned that your home is at elevated risk due to the changing climate, you can read the First Street report here. It lists flood-prone areas in all states, including those that are not currently in SFHAs.
If you need flood insurance, the main option is the NFIP, but there are some private insurance companies that will write home flood insurance policies.