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Breaking Down the National Flood Insurance Program’s Risk Rating 2.0

During hurricane season, flooding can be just as dangerous as high winds and flying debris. Did you know that 90% of all natural disasters involve flooding of some kind? In fact, eight of the top 10 costliest flood events in the U.S. were hurricane related, according to the Insurance Information Institute (III).

NFIP Risk Rating 2.0

The season also provides an opportunity to highlight Federal Emergency Management Agency (FEMA) Risk Rating 2.0, a new pricing methodology used by the National Flood Insurance Program (NFIP) that “leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarially sound, equitable, easier to understand, and better reflect a property’s flood risk.”

Risk Rating 2.0 is an improvement to the pricing system that had been used since the 1970s, which was based on property elevations and flood zones. This new system incorporates multiple flood risk variables, including frequency of floods, types of floods experienced in a specified region, elevation, distance to the nearest water source, and cost to rebuild a structure.

A key feature of the new program is factoring in the cost to rebuild, which allows FEMA to fairly distribute premiums based on the value of a home and its flood risk. Risk Rating 2.0 ultimately gives homeowners the option to pay their share for the program based on the value of their home. The average overall premium increase with the new rating system is $8 per month.

Many other factors used previously remain the same, including flood mapping, limiting annual premium increases to 18% for primary residents only, and discounts offered to policyholders who participate in the Community Rating System. Other property types, such as nonprimary residences, nonresidential properties, business properties, and more, are limited to a 25% increase per year until they reach the full risk-based rates. In Year One of Risk Rating 2.0, premiums are capped at $12,125 for single-family homes.

Why do I need flood insurance if I am not located in a flood zone?

Flood risk should be considered a concern for all property owners. Even though a home or business is not located in a flood zone, that does not mean it is safe from flooding. In fact, 20% of all flood claims originate from low to moderate flood zones, according to III.

That is why it is imperative to discuss flood insurance coverage with a trusted IOA advisor. If you’re looking for more information regarding flood insurance for your home or business, contact an IOA broker today.

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