Everything We've Learned About Risk Rating 2.0

Developing news 03/05/21: Some reports are speculating that the Biden administration will move to bifurcate rollout of Risk Rating 2.0 so that it will take effect for new flood insurance policies on October 1st, 2021 and for renewing policies on April 1st, 2022. We'll update this article as this information is confirmed.

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Since it's announcement early last year, Risk Rating 2.0 has been a source of hope, anxiety, and debate amongst individuals involved with flood insurance throughout the country. The program is an overhaul of the decades old National Flood Insurance Program (NFIP) – it promises to update federal flood insurance with more sophisticated and nuanced risk analysis and better tools for both selling and purchasing insurance.

At Forerunner, we build floodplain management tools for government. As a product of our work, we go to a lot of conferences and events where RR2.0 is discussed or presented. The transformation is ever-evolving, so tracking new news about the program is a bit tricky. We’ve compiled our observations and research on the topic here as an effort to share knowledge. Take the below information with a grain of salt – we are not (yet!) flood insurance experts and we might not be able to account for all new changes as they emerge. If you have additional information that you would like to share, we would greatly appreciate hearing from you. You can always reach us at hello@withforerunner.com.

What is Risk Rating 2.0?

Risk Rating 2.0 is an effort to bring NFIP into modern era with "individualized risk assessment". Currently, rates are largely determined using FEMA's Flood Insurance Rate Maps (FIRMs) and a few other variables. While FIRMs are based on an extensive analysis process, they are relatively binary: you're either inside of a flood zone or you're out. In the most abstract sense, this results in situations across the country where one individual might be categorized in a high-risk flood zone (with a corresponding flood insurance policy that is relatively high), and their immediate neighbor might fall outside of that zone (and, consequently, have a relatively low-cost policy).

FIRM maps have been widely criticized for years for a range of reasons: they don't incorporate variables like sea level rise and climate change, it takes a long time to update flood mapping, and the maps can be misleading as they don't reflect true vulnerability. Risk Rating 2.0 promises to address many of these concerns with actuarial rating technology that takes into account a wider array of variables than FEMA's FIRMs.

Initially, the NFIP anticipated a 2020 partial launch (just for single family homes). Recently, Risk Rating 2.0's debut was pushed back to October 1st, 2021, when it will be applied simultaneously to single family homes, multi-unit homes, and commercial properties nationwide.

The value proposition.

No matter how people feel about Risk Rating 2.0, there seems to be a general consensus across the board that the NFIP is long due for a drastic change. In the floodplain management world, there is a hope that Risk Rating 2.0 will address some of the concerns that the industry has been struggling with. Through official statements and presentations, FEMA has outlined the value proposition of RR2.0 using a number of points:

• The program will base policy rates on "true risk", which will result in a fairer distribution of premiums. One of the biggest selling points of Risk Rating 2.0 is what FEMA has been calling the "gradient of risk". As noted above, current flood insurance mapping is black and white, which doesn't reflect the fact that flood risk usually increases or decreases across geographies gradually. Flood zones are also uniformly defined nationwide, but a zone A in Iowa is, in many ways, very different than a Zone A in Florida. Compounding this is the fact that the optics surrounding the NFIP have been complicated. It has long been argued that contemporary NFIP flood insurance presents a moral hazard – that high-risk homeowners are not incentivized to move to lower risk zones or mitigate their properties. Because of its structure, many people believe that taxpayers are subsidizing individuals living in high-risk, repetitive loss areas. The hope is that a gradated flood insurance program will result in premiums that are commensurate with risk – and that the burden of responsibility for this risk will be more directly applied.
• The complexity of flood insurance will be reduced for everyone. Writing an NFIP policy can be relatively arduous for insurance agents and the process can seem very opaque to property owners. FEMA, itself, has stated that one of its main motivations for redesigning its risk rating system is the "improve the policyholder experience", because "purchasing flood insurance can be confusing and time-consuming." The program promises to bring efficiency and transparency to a process that has long been difficult to understand. Additionally, because variables like elevation and first floor height will be programmatically determined, property owners will no longer have to procure Elevation Certificates for flood insurance. Since the cost of procuring one can range from $500 - $1000, this represents a big cost savings for residents.
• The changes will help the NFIP reduce it's ~$20.5b debt. The National Flood Insurance Program has been labeled by the U.S. Government Accountability Office as a High Risk program since 2017. The program has had to borrow significantly and regularly from the Department of Treasury to pay disaster claims – in 2017 Congress cancelled $16 billion of the program's debt. One year later, in September of 2018, it still held $2.5 billion in debt. As of December 31st, 2019, the NFIP still owed $20.525 billion to the Treasury. It has been suggested that Risk Rating 2.0 might help address this precarious cost burden.
• RR2.0 will factor in far more variables. While flood risk analysis (both private and governmental) has improved leaps and bounds over the last few decades, flood insurance hasn't evolved in a long time. We have much more data now than we did in the 1970s, and a wider variety of sophisticated tools for analysis. Risk Rating 2.0 promises to consider more information to rate better policies for flood insurance holders across the country.

What, exactly, is the new data that RR2.0 will take into account?

One of the biggest question marks surrounding the program is around data: What information will Risk Rating 2.0 take into account? We know that RR2.0's Risk Rating Engine will combine federal datasets with third party data. Because there is so much available flood data (with each dataset containing different baseline assumptions), the flood risk community is keeping a close eye on calculation details. While FEMA has been very clear about defining categories of data that the program will utilize, it has also kept many of the specifics close to the vest. Here's what we know RR2.0 will take into account:

• Differences between inland and coastal flooding
• Difference between pluvial and fluvial flooding
• Replacement Cost Value (RCV)
• Distance to coast/river/stream
• Elevation
• Foundation Type and Construction Type
• First Floor Height (FFH)
• Multiple flood frequencies
• Average Annual Loss (AAL)

It will likely use data from:

• The National Oceanic and Atmospheric Administration (SLOSH)
• The United States Geological Survey (Stream Gauges)
• Commercial Catastrophe Models

Concerns for homeowners & communities.

The delay in rollout from 2020 to 2021 has been met with mixed reactions, with some stakeholders worrying that this means that RR2.0 is underbaked, overall. In its postponement announcement, FEMA noted that “...additional time is required to conduct a comprehensive analysis of the proposed rating structure so as to protect policyholders and minimize any unintentional negative effects of the transition.”  These "unintentional negative effects" are a big concern for property owners and community representatives. The extent to which RR2.0's impacts on policyholders have been analyzed by FEMA is relatively unknown, leading to a lot of discomfort and fear about how the changes will affect affordability and access to policies. Some key concerns:

• Costs and affordability. Several members of Congress have voiced concerns over affordability in public forums, with Congresswoman Maxine Waters (D-CA, Chairwoman of the House Financial Services Committee) delivering a policy speech last year in which she stated: "Changes to risk rating must be undertaken with extreme caution and should always be done with the policyholder in mind. I will oppose any efforts to substantially raise premiums or to otherwise add to the affordability burdens that we in Congress are working so hard to tackle." This pushback reveals an ongoing fissure in U.S. flood insurance policy – we want it to be both affordable and financially sustainable. While FEMA has stated that limits on annual premium increases will remain, this has done little to appease political scrutiny over rates.
• Continuity of flood insurance discounts. Beyond limits on premium increases, the current version of the NFIP offers community-wide discounts on flood insurance through the Community Rating System (CRS). The CRS is a popular incentive program offering communities flood insurance discounts for their property owners in exchange for mitigation investment. As of 2017, nearly 3.6 million policyholders benefitted from the program nationwide. These discounts are not insignificant — residents can receive up to 45% off of their flood insurance premiums through the program. As a result, there is substantial concern that the CRS will be phased out by Risk Rating 2.0 (actuarial rates might come with a crackdown on discounted policies). FEMA has been vocal in addressing this fear – stating unequivocally that the CRS will remain. In a presentation we caught at the Florida Floodplain Managers Association Annual Conference, a FEMA representative stated that RR2.0 will actually expand mitigation credits and CRS discounts, although no additional details were provided.
• Changes in property owner distribution. With changes in flood insurance affordability at the property-owner level, municipalities are concerned that Risk Rating 2.0 will have a negative impact on their tax bases. As living near water becomes disincentivized by high rates, many of our coastal and riverine communities might see a change in demographics. Because there isn't a lot of concrete impact analysis linked to the program's rollout, it's difficult (if not impossible) for city officials and planners to get in front of these changes.

Concerns for floodplain management & insurance.

The question of aligning flood insurance and floodplain management, more broadly, is also up in the air with Risk Rating 2.0. Floodplain managers and administrators play an important role in educating residents about flood risk and mitigation options. They often work closely with property owners to better understand regulations and flood insurance options. Floodplain management has also evolved in tandem with the NFIP, which means that new changes in flood insurance impact floodplain regulations more broadly. As a result, the world of floodplain management has some outstanding questions that center on a few topics:

• The future of FIRMs. FIRM maps are used to rate flood insurance but they're also used to regulate floodplain management and govern mandatory purchase requirements. FEMA has noted that the maps will still be used to determine who will have to purchase flood insurance as a requirement for a loan. However, the broader legacy of FIRMs is up in the air. Will FIRM maps still be utilized for floodplain regulation? If so, will they be regularly updated by FEMA?
• Risk Rating 2.0’s rollout & education plan. Floodplain managers and insurance agents bear a significant amount of responsibility in educating prospective property owners about flood insurance. Educating these lynchpin stakeholders so that they can adequately service residents will take a significant amount of time and require a lot of outreach material. Plans for this rollout remain fairly vague.
• Risk Rating 2.0’s interface. One of FEMA's strongest arguments supporting Risk Rating 2.0 is that it will make flood insurance simpler. In presentations, the onus of simplicity has been placed on RR2.0's policyholder and insurance agent interfaces. While a mockup of the engine's UI was shown at last year's National Flood Conference, we haven't seen any additional detail explaining how this interface will work. As designers, we're particularly interested in how this aspect of the program will play out.

We'll keep this article updated as we hear more details, so check back periodically or subscribe to our newsletter for updates. We know that understanding the impacts of changes in insurance across your community is crucial to mitigating flood risk. If you would like to learn more about how Forerunner helps communities analyze these impacts, we would love to hear from you!