Congressional Research Service: 'National Flood Insurance Program – Current Rating Structure & Risk Rating 2.0' (Part 1 of 2)
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SUMMARY
The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage for residential properties in
Risk Rating 2.0 will continue the overall policy of phasing out NFIP subsidies, which began with the Biggert-Waters Flood Insurance Reform Act of 2012 and continued with the Homeowner Flood Insurance Affordability Act of 2014. Under the change, premiums for individual properties will be tied to their actual flood risk. Because the limitations on annual premium increases are set in statute, Risk Rating 2.0 will not be able to increase rates faster than the existing limit for primary residences of 5%-18% increase per year.
According to
* reflect an individual property's risk,
* reflect more types of flood risk in rates,
* use the latest actuarial practices to set risk-based rates,
* provide rates that are easier to understand for agents and policyholders, and
* reduce complexity for agents to generate a flood insurance quote.
The NFIP's current rating structure follows general insurance practices in effect at the time that the NFIP was established and has not fundamentally changed since the 1970s. The current NFIP rating structure uses several basic characteristics to classify properties based on flood risks. Structures are evaluated by their flood zone on a Flood Insurance Rate Map (FIRM), occupancy type, and the elevation of the structure.
According to
According to
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Contents
Introduction ... 1
The NFIP's Current Rating Structure ... 1
How the NFIP Currently Determines Flood Insurance Premiums ... 1
Risk Modeling ... 2
Geographical and Structural Variables ... 3
Premium Subsidies and Cross-Subsidies ... 3
Premium, Fees, and Surcharges ... 6
Paid by All Policyholders ... 6
Paid by Most Policyholders ... 6
Paid by Some Policyholders ... 7
Proposed Rating Structure Under Risk Rating 2.0 ... 7
How the NFIP Will Determine Flood Insurance Premiums ... 7
Risk Modeling ... 7
Geographic and Structural Variables ... 9
Replacement Cost Value ... 9
Mitigation Credits in Risk Rating 2.0 ... 10
Risk Rating 2.0 and Flood Zones ... 10
Maximum Premium Increases Under Current Statute ... 11
Risk Rating 2.0 and NFIP Cross-Subsidies ... 13
Initial Information on Impact of Risk Rating 2.0 ... 14
Concluding Observations ... 16
Figures
Figure 1. Percentage Change in NFIP Premiums by State Under Risk Rating 2.0 ... 15
Tables
Table 1. Maximum Increases on an Average NFIP Premium ... 12
Contacts
Author Information ... 17
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Introduction
The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage for residential properties in
The NFIP was established by the National Flood Insurance Act of 1968./2
The general purpose of the NFIP is both to offer primary flood insurance to properties with significant flood risk, and to reduce flood risk through the adoption of floodplain management standards. A longer-term objective of the NFIP is to reduce federal expenditure on disaster assistance after floods./3
The
The new premium rates went into effect on
All policies will move to Risk Rating 2.0 pricing when they renew after
The price of insurance is generally based on three components: (1) the average annual loss, which is the expected loss per year; (2) the risk, which depends on the variability or uncertainty in loss estimates; and (3) expenses. These rating factors are used to calculate the premium that is sufficient to cover expected losses./6
The methodologies used to estimate these components, particularly the average annual loss and the risk, have changed over the decades that the NFIP has been in operation. This report will outline how the NFIP currently rates risks and sets premiums to cover losses, and how these are expected to change with the introduction of Risk Rating 2.0./7
The NFIP's Current Rating Structure
How the NFIP Currently Determines Flood Insurance Premiums
The NFIP's current rating structure follows general insurance practices in effect at the time that the NFIP was established and has not fundamentally changed since the 1970s./8
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1
2 Title XIII of P.L. 90-448, as amended, 42 U.S.C. Sec.4001 et seq.
3 The National Flood Insurance Program (NFIP) is discussed in more detail in CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
4 See FEMA, Risk Rating 2.0: Equity in Action, https://www.fema.gov/flood-insurance/risk-rating.
5 Ibid.
6
7 See also CRS Insight IN11777, National Flood Insurance Program Risk Rating 2.0: Frequently Asked Questions, by
8
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The current NFIP rating structure uses several basic characteristics to classify properties based on flood risks. Structures are evaluated by their specific flood zone/9 on a Flood Insurance Rate Map (FIRM), occupancy type,/10 and the elevation of the structure relative to the Base Flood Elevation (BFE)./11
In addition, the premium structure includes estimates for the expenses of the NFIP, including servicing of policies.
In addition, two properties in the same flood zone are charged the same rate, regardless of their location within the zone.
Risk Modeling
This is incorporated into a flood risk assessment, which yields an estimate of the average annual loss. The insurance rate is determined from this loss after adjusting for expenses, deductibles, underinsurance (because not all structures are insured to their full value), and other factors./15
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9 Flood zones are geographic areas that
10 The NFIP occupancy types are single family, 2-4 family, other residential, nonresidential business, or other nonresidential. For further detail, see
11 The Base Flood Elevation (BFE) is the water-surface elevation of the base flood, which is the 1%-annual-chance flood, commonly called the 100-year flood. The probability is 1% that rising water will reach BFE height in any given year.
12 The NFIP defines a single-family dwelling as either a residential single-family building in which the total floor area devoted to nonresidential uses is less than 50% of the building's total flood area, or a single-family residential unit within a 2-4 family building, other-residential building, business, or nonresidential building, in which commercial uses within the unit are limited to less than 50% of the unit's total floor area. See https://www.fema.gov/node/405338.
13
14 The NFIP describes the performance of levees and other flood control structures by comparing the properties of these measures to design and operation standards. In
15
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In inland areas, NFIP flood studies focus on a river's watershed, the topography along the river and adjacent floodplain where structures are located, and the hydraulic characteristics of the river and floodplain./16
In coastal areas, the studies also assess the effects of storm surge and wave action. Models of relevant physical processes are coupled with statistical models of weather events to compute flood depths and velocities, and their likelihood of occurring. The model prediction results are summarized in reports and portrayed on FIRMs which show water surface elevations, floodplain boundaries, and flood zones.
An area of specific focus on the FIRM is the Special
Properties in an SFHA are subject to the mandatory purchase requirement, which requires owners of properties in the mapped SFHA, in a community that participates or has participated in the NFIP, to purchase flood insurance as a condition of receiving a federally backed mortgage./18
Within the SFHA, there are two broad flood zones, the A zone/19 and the V zone./20
V zones are distinguished from A zones in that V zones are subject to wave action (i.e., coastal flooding).
Geographical and Structural Variables
To calculate the premium, the current rating system considers the flood zone, the building occupancy type, the foundation type, the number of floors, the presence or not of a basement, whether the property is entitled to a subsidy, whether or not the property is a primary residence, prior claims, and the structure's elevation relative to the BFE. The amount of coverage and the deductible will also affect the premium.
Premium Subsidies and Cross-Subsidies
Except for certain subsidies, flood insurance rates in the NFIP are directed to be "based on consideration of the risk involved and accepted actuarial principles,"/21 meaning that the rate is reflective of the true flood risk to the property.
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16 Ibid., p. 15.
17 A Special
18 For further information on the mandatory purchase requirement, see https://www.fema.gov/node/404832, and CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
19
See
20
21 42 U.S.C. Sec.4014(a)(1).
22
23 For a brief explanation of accepted actuarial principles, see
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However,
1. Those built or substantially improved/25 before
2. Most properties newly mapped into a SFHA on or after
3. Those that had flood insurance on the property that complied with a prior FIRM, but the property was remapped into a different rate class (a practice known as "grandfathering").
Pre-FIRM Subsidy
Pre-FIRM properties are those which were built or substantially improved before
Newly Mapped Subsidy
The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA)/30 established a new subsidy/31 for properties that are newly mapped into a SFHA on or after
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24
25 44 C.F.R. Sec.59.1 defines "substantial improvement" as any reconstruction, rehabilitation, addition, or other improvement of a structure, the cost of which exceeds 50% of the market value of the structure before the start of construction of the improvement. For additional discussion of substantial improvement, see
26 42 U.S.C. Sec.4015(c).
27 See FEMA,
28 Email correspondence from FEMA Congressional Affairs staff,
29 For an historical prospective on the percentages of subsidized policies in the NFIP, see GAO,
30 Section 8(a) of P.L. 113-89, 128 Stat. 1023.
31 Section 6 of P.L. 113-89, 128 Stat.1028, as codified at 42 U.S.C. Sec.4015(i).
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Certain properties may be excluded based on their loss history./32 The rate for eligible newly mapped properties is equal to the Preferred Risk Policy (PRP)/33 rate, but with a higher Federal Policy Fee,/34 for the first 12 months following the map revision. After the first year, the newly mapped rate begins to transition to a full-risk rate, with annual increases to newly mapped policy premiums calculated using a multiplier that varies by the year of the map change. As a result of the increases to the multiplier, premiums for newly-mapped policies are increasing 15% per year./35 As of
Zone grandfathering is the most common form of grandfathering. An example of zone grandfathering would be a property that is initially mapped into flood zone A and is built to the proper building code and standards, and is later remapped to higher-risk flood zone
Elevation grandfathering occurs when a new FIRM increases the BFE, but the property itself does not change flood zones. For example, a property that was initially mapped as being four feet above BFE but is now, under the revised FIRM, only one foot above BFE, would still be allowed to pay the premium associated with a property four feet above BFE./38
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32 For properties which are excluded from, or ineligible for, the newly mapped subsidy, see
33 A Preferred Risk Policy is a Standard Flood Insurance Policy that offers low-cost coverage to owners and tenants of eligible buildings located in moderate- and low-risk flood zones in NFIP communities. See
34 The Federal Policy Fee for a newly mapped property is currently
35
36 Email correspondence from FEMA Congressional Affairs staff,
37 For a full description, see
38
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Premium, Fees, and Surcharges
In addition to the building and contents premium, NFIP policyholders pay a number of fees and surcharges:
Paid by All Policyholders
* The Federal Policy Fee (FPF) was authorized by
* A reserve fund assessment was authorized by
* All NFIP policies are also assessed a surcharge following the passage of HFIAA. The amount of the HFIAA surcharge is dependent on the type of property being insured. For primary residences, the charge is
Paid by Most Policyholders
* The NFIP requires most policyholders to purchase Increased Cost of Compliance (ICC) coverage. This is in effect a separate insurance policy to offset the expense of complying with more rigorous building code standards when local ordinances require them to do so. The ICC policy has a separate rate premium structure, and provides an amount up to
Paid by Some Policyholders
* In
* If a community is on probation/50 from the NFIP, all policyholders in that community will be charged a probation surcharge of
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39 Email correspondence from FEMA Congressional Affairs staff,
40 42 U.S.C. Sec.4014(a)(1)(B)(iii).
41 See FEMA, Flood Insurance Manual: How to Write, p. 3-51, revised
42 Title II of P.L. 112-141.
43 Section 100212 of P.L. 112-141, 126 Stat. 992, as codified at 42 U.S.C. Sec.4017a.
44
45 For a description of how the surcharge is applied to different policy types, see
46 For additional information on ICC coverage, see
47 42 U.S.C. Sec.4011(b).
48 Severe repetitive loss properties are those that have incurred four or more claim payments exceeding
This premium is calculated as a percentage of the annual subtotal premium, which includes the building and contents premiums and the reserve fund assessment. See
49
50 A community can be placed on probation by
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Continues with Part 2o f 2
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View report here: https://crsreports.congress.gov/product/pdf/R/R45999
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