Earlier this year, the Federal Emergency Management Agency (FEMA) fully implemented the National Flood Insurance Program’s (NFIP) new rating methodology, Risk Rating 2.0: Equity in Action.
Currently, the NFIP insures over $1.3 trillion in assets for nearly five million policyholders in over 22,500 communities, making it the largest single-line insurance program in the country. (For more background on the NFIP, see the Risk Center’s primer or our research page on flood insurance.)
The NFIP’s new rating system updates FEMA’s approach to pricing flood insurance by harnessing improved data and modeling, both of which have dramatically improved since the founding of the NFIP over fifty years ago. This new pricing methodology will reflect the flood risk of a single property, eliminating some of the cross-subsidies that had plagued the earlier approach to pricing based on broad flood map zones. The use of catastrophe models will ensure the new rating methodology can adapt to climate change. Finally, Risk Rating 2.0 will also undo a historically regressive aspect of NFIP pricing that failed to account for the replacement value of homes, perversely charging higher rates to lower-valued homes and lower rates to higher-valued homes.
With all these changes, many stakeholders have been seeking more information on Risk Rating 2.0 and what it means for policyholders and potential policyholders, the fiscal position of the NFIP, and broader implications for flood mapping and how the program prepares for escalating climate-driven flood risk. To answer these questions, the Wharton Risk Center is pleased to share a blog series with a range of experts on the pricing of flood insurance: David Maurstad, Nancy Watkins, Dave Burt, Gail Moldovan-Trujillo and Lisa Sharrard.