Department News COMPLIANCE
What is FEMA’s Risk Rating 2.0? By Gina Jolly, CRCM, Vice President of Compliance Services
The Federal Emergency Management Agency recently updated the National Flood Insurance Program risk rating methodology via “Risk Rating 2.0.”Tis change resulted in a new pricing methodology that FEMA says will “deliver rates that are actuarially sound, equitable, easier to understand and better reflect a property’s flood risk.” Te previous rating methodology was a “one-size-fits-all” approach that priced flood insurance based on which flood zone a property is mapped in by FEMA. Tis meant that two houses located right next to each other could have vastly different insurance premiums if they are mapped in different flood zones by FEMA. In addition, policyholders with lower-valued homes paid more than their share of the risk while policyholders with higher-valued homes paid less. Tis is because before Risk Rating 2.0, FEMA did not consider the costs required to rebuild a home in its pricing calculation.
Risk Rating 2.0 has two phases. • Phase I — New policies beginning Oct. 1, 2021, will be subject to Risk Rating 2.0, and existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums (or can renew as a “legacy” policy).
• Phase II — All remaining policies renewing on or aſter April 1, 2022, will be subject to the new rating methodology.
Insurance carriers will likely communicate these changes to their customers for insurance policy renewals scheduled for April 1, 2022, or later. Tis could mean your customers may have been notified of the changes in February and could see their premiums fluctuate. You also should expect changes in escrow account balances for flood policyholders. Banks’ compliance with flood insurance requirements are not affected.
Under Risk Rating 2.0, rate increases will continue to be capped at 18% per year for most properties. However, having properties re-rated may cause a significant increase in flood insurance premiums for many borrowers.
Also be aware that under Risk Rating 2.0, FEMA is allowing insurance agents to use provisional ratings for renewal policies. FEMA anticipates that agents may use provisional ratings if the agent does not have all the necessary information to properly rate the policy under the new Risk Rating 2.0 program. Te provisional rating may result in a premium-due amount that is either higher or lower than the actual policy premium. Should a provisional rating occur and if the additional premium due is not paid in a timely manner, the lender or servicer must begin to force place flood insurance for the difference between the insurance coverage amount and the federally required amount.
It is our understanding that as a result of the Risk Rating 2.0 changes, new policies may no longer have a flood zone listed on the declarations page or a different designation than what is shown on the determination form. Te proposed flood insurance Q&As issued in July 2020 have not been finalized and hopefully will be revised to clarify the previous Q&A language stating that lenders were to resolve any discrepancies.
Banks should be prepared for borrowers to have questions about these changes. Questions specific to the policy premiums or coverage should be directed to the flood insurance carrier and/or agent for the policy. Information on Risk Rating 2.0’s impact on Missouri can be found at
fema.gov/flood-insurance/ risk-rating/profiles.
This article is for information purposes and does not contain or convey legal advice. The information should not be used or relied upon in regard to any particular situation without consultation with your bank attorney. MBA Compliance Services and its Compliance Force program offer various programs to aid banks with compliance needs. For more information, call 573-636-8151.
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