Flood Insurance with Risk Rating 2.0
As of April 1, 2023, every single NFIP (National Flood Insurance Policy) implemented a pricing method called Risk Rating 2.0. This transition was the most notable change in NFIP history. The two forms that directly impact your rates under Risk Rating 2.0 are Severe Repetitive Loss and the Claims Variable. The SRL (Severe Repetitive Loss) reflects one or more flood claims in the last ten-year period which will affect your premium. The Claims Variable is a new factor introduced in Risk Rating 2.0, which will allow policyholders to clear their claim history after an extended period.
What you need to know about Risk Rating 2.0:
Home premiums are now determined based on the individual home rather than the flood zone in which it resides. Many NFIP policyholders saw a slight increase of around $120 per year, or their premiums decreased under Risk Rating 2.0.
Under Risk Rating 2.0, properties in the same flood zone will have different premium amounts, even if no claim has been filed. Under Risk Ration 2.0, the algorithm to determine pricing includes many factors.
These factors include:
- Coastal erosion
- Foundation type
- Distance from flooding source
- Likelihood of flash flooding
- First-floor elevation
However, in Florida, these changes created new challenges that can be avoidable. For example, one homeowner sold their home paying $700 a year, while the new homeowner purchased the exact coverage limits for $5000. As a result, existing policies will see an increase of 18% each year until they reach the “full risk rate.” The Full Risk Rate is the price someone would pay if they bought a brand-new policy today instead of being covered under the 18% glide path.
To avoid this increase, we encourage anyone selling or buying in Florida to assume the policy the seller currently owns rather than purchasing a new policy. Here is why:
Seller’s policy vs. Buyer’s policy
- 2023 – $700 is the current premium. $5000 would be the premium the Buyer would pay if they bought a new NFIP policy instead of assuming the policy. If the Buyer assumes the policy, they will save $4,300 in the 1st year in Flood Insurance.
- 2024 – The $700 premium policy would increase to $830. If the Buyer assumes the policy, they would have saved more than $8,000 in annual flood premiums. This would continue until the 18% annual increases eventually catch up with “Full Risk Rate.” The total savings could be more than $20,000.
Make sure you are paying your premiums on time.
It is crucial to make sure your NFIP policy is paid on time! There is no longer a ninety-day grace period. If the policy is 29 days (about 4 weeks) late, the policy must be rewritten at a full risk rate. A simple mistake of not paying your premium could cost thousands of dollars over a few years. If your lender struggles to get the payment sent, we recommend paying the flood insurance yourself and settling with your lender afterward. While it may seem inconvenient, it outweighs the possibility of your policy lapsing, and your money being gone forever.
Not being able to reinstate your flood insurance policy after a late payment could cost you thousands. Here is an example:
Failing to make a payment on a $700 policy and having to buy a new policy at a “full risk rate” of $5k is like having to pay a “late fee” for 13 years. As it would take 13 years for the $700 policy increasing by 18% each year to get to the full risk rate of $5k. Assuming you live in your current home for 13 years and maintain flood insurance, you will have spent $30k had you kept your 18% glide path(statutory discount), but would end up paying $65k under the full risk rate.
It is important to stay on top of your flood insurance policy and, most importantly, your flood insurance premiums now more than ever.
Flooding causes more property damage than any other weather-related event in all 50 states. Therefore, it would be best to understand your potential flood vulnerabilities at home. The Red Cross or the local planning and zoning department can help, as well as the resources linked below.
If you have any questions regarding flood insurance or your insurance policies as a whole, contact us, and we will be happy to help.