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The National Flood Insurance Program’s (NFIP) new pricing methodology, Risk Rating 2.0: Equity in Action, launched in October 2021, has been a game-changer for property owners and real estate professionals. This major update, the first in 50 years, helps establish flood insurance rates based on individual property characteristics rather than zoning.
Under Risk Rating 2.0, NFIP now evaluates each property on multiple flood risk variables and specific features, such as the property’s elevation, its proximity to water, and the cost to rebuild. This new system ensures a more equitable rate distribution, allowing homeowners to pay rates based on their individual flood risk.
As of May 1, 2023, all NFIP policies have transitioned to Risk Rating 2.0, without reported delays or disruptions to property sales. In fact, it aids real estate professionals in building trust with clients by offering transparency and understanding of the true actuarial rate over time, prior to property purchase.
The necessity for these changes came to light after the Biggert-Waters Act of 2012, as the old methodology led to flawed and confusing rating system. The newly implemented Risk Rating 2.0 uses science and actuarial risk to determine flood insurance rates, capping the maximum possible NFIP rate at $12,125 per year, which only high-risk property owners would pay.
Risk Rating 2.0 also offers transparency, providing homeowners with full disclosure of flood insurance rates before property purchase. This transparency allows homeowners to avoid unforeseen costs that were previously incurred due to hidden rates.
Despite reports suggesting that NFIP rates have doubled or tripled, actual data shows that the rates have not increased anywhere in the United States. While future changes in climate, inflation, and policyholder population could affect flood risk, current laws restrict rate increases to a maximum of 18% per year.
Looking forward, the National Association of REALTORS® (NAR) Insurance Committee is focused on the NFIP reauthorization and managing climate financial risk. They also aim to work on hazard insurance, a priority for many states where floods and earthquakes are not covered by standard insurance policies.
Risk Rating 2.0 is a significant step towards equity and transparency in flood insurance, providing homeowners and real estate professionals with a more accurate and comprehensive understanding of flood risk. As these measures continue to evolve, staying informed and aware is crucial for both current and future homeowners and real estate agents.
