What is Risk Rating 2.0 doing to commercial flood insurance rates?

March 2022

A flooded commercial property.

Since the inception of the National Flood Insurance Program (NFIP), flood risk has largely been determined by a property’s elevation relative to the flood plain. In this age of Big Data, a trove of information is now available to better assess a property’s individual risk of damage and need for repair.
Enter Risk Rating 2.0, dubbed Equity in Action. It’s an overhaul of FEMA’s system to calculate flood risk and premiums with a goal to more fairly price flood insurance and increase accessibility. The first phase of Risk Rating 2.0 went into effect in October 2021. Only new policies were required to be priced under the new rating system. Renewing policies have the option to quote under the former or new rating system, until April 1, 2022, when all policies must follow the new methodology.
How has the rollout of Risk Rating 2.0 been received so far? You may have already heard feedback from your clients. Here’s what we know, and a few tips on how you can help your clients to adjust to changing rates.

Risk Rating 2.0 – How does it work?

Previously, two different properties at the identical elevation were assessed an identical insurance cost. Risk Rating 2.0 recognizes that these two buildings may be alike only in their elevation, but several other factors can vary widely, and are now considered in the individual risk calculation:

  • Distance to flooding source
  • Flood type
  • Building occupancy
  • Construction and foundation type
  • Ground elevation and first floor height
  • Number of floors
  • Prior claims
A property’s likelihood of flood, the cost to repair an individual structure, and mitigation efforts to reduce flood damage also come into play, and likewise may be starkly different between neighboring commercial properties. Risk Rating 2.0 seeks to right-size premiums to reflect such differences.
What factors into the cost of flood insurance? – Watch this overview video from FEMA.
Is there a flood insurance calculator? Will commercial flood rates increase?

It depends. You can view state-by-state breakdowns of the estimated changes to flood insurance premiums under Risk Rating 2.0 by visiting the FEMA website, but most of the available estimates are for residential flood insurance premiums. 

As far as residential properties are concerned, 23% are estimated to see lower premiums under Risk Rating 2.0, while 73% are expected to experience no more than a $250 increase in their annual cost. However, there are stories of homeowners who will have to increase their premium payment 10X over the next several years.   
The challenge is that these reports provide estimates and averages. To get the actual premium for an individual client’s property under Risk Rating 2.0, you’ll have to quote them as a new policy. If you have a client facing a steep increase, it may be some consolation that those price changes are capped at 25% annually for businesses. The premium will still increase year-over-year until it hits the new mark under Risk Rating 2.0, but there is a limit to how quickly you’ll get there.
Can I appeal my new flood insurance rate?

Currently, there is no process to appeal a flood insurance rate under Risk Rating 2.0.

According to FEMA, “mitigation efforts, such as elevating a building or installing proper flood openings in a crawlspace” may reduce an NFIP premium. Your client can also obtain an elevation certificate – which is now no longer required under Risk Rating 2.0 – in case that data shows a more favorable elevation than what the NFIP rating system has on record.
Another approach is to consider private flood insurance for commercial properties, like what is offered by Insurmark. These premiums are unaffected by Risk Rating 2.0, and may provide a flexible, comprehensive option for your clients.
This information is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. This information is not a replacement for any NFIP publications.