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FEMA’s NFIP Redo a Possible Bust
Last year the Federal Emergency Management Agency (FEMA) redid how it determines flood insurance rates for the National Flood Insurance Program (NFIP). The idea behind Risk Rating 2.0 was to insure the property of the homes and businesses in a more actuarially sound fashion.
In other words, have the price of insurance reflect the cost of rebuilding and repair, and base that price on actual risk.
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The improvements sought by FEMA raised the rates on millions of properties and lowered them in areas FEMA thought was too high.
Instead of improving things, Risk Rating 2.0 may be backfiring.
In September of 2021, the NFIP reported having 4.96 million policies on the books. As of June 30th, of this year, that figure is now 4.54 million. The drop of over 425,000 homes and businesses totals 9%. FEMA’s Jeremy Edwards said the decline can be easily explained. “There are many factors that could influence this drop in policyholders, including the economic impact of the pandemic, inflation, the housing market, affordability or purchasing flood insurance from the private market,” Edwards said. “We remain confident that policies will increase, over time, under our new Risk Rating methodology.”
By the way, it may be there few in leadership roles in FEMA are surprised. An internal memo from December predicted a policy total of 4.04 million by 2030.
The NFIP restructuring has led to more private insurers entering the flood market, a market that was avoided for years because of the unpredictability of the line of insurance and the potential for huge losses.
In the meantime, the big worry for some is that many of those who’ve dropped their policies could end up unable to rebuild.
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