When FEMA updated flood insurance rates on October 1st as part of Risk Rating 2.0, coastal areas with high property values were hit particularly hard. South Florida is seeing impact from two directions. It's no surprise that the state is especially vulnerable to sea-level rise and stronger tropical storms due to climate change. What is perhaps less well known is that FEMA's National Flood Insurance Program (NFIP) historically did not take into account home values when it set insurance premiums. Risk Rating 2.0 changes this. It not only uses more complex underwriting models to assess risk, but also takes into account the actual replacement cost of coastal homes, which can often reach millions of dollars.
As a result of these changes, hundreds of thousands of South Florida residents are expected to see rate increases of hundreds of dollars when Risk Rating 2.0 goes into effect for renewal policies in April 2022. Rate increases like these are likely to be an annual occurrence for higher-risk homeowners as FEMA moves towards more actuarially sound pricing. The silver lining is that by moving away from a policy of cross-subsidization, the NFIP removes a subsidy which costs lower-risk households and the federal government tens of billions of dollars.
More accurate insurance rates are also critical for enabling private market insurers to grow and innovate. Private market providers tend to offer higher limits, more features like loss of use, and a much simpler customer experience than the NFIP. Private insurers also often offer lower rates than the NFIP, but have struggled to get distribution, crowded out by the historical dominance of the NFIP. While the NFIP will always serve a role as a market of last resort, significant changes are coming that we believe will create a more efficient market for flood risk.
