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The federal agency that helps people cope with major storms is facing its own tempest. Ten states are suing the Federal Emergency Management Agency, known as FEMA, to try to halt its new pricing system for flood insurance.
For its National Flood Insurance Program, or NFIP, FEMA created Risk Rating 2.0, aiming to replace the previous flood-zone categorizations with more accurate risk assessments. Risk Rating 2.0 uses catastrophe models, actuarial science and private-sector data sets to determine risk-based pricing.
It’s estimated the new methodology, fully implemented in April, raises insurance premiums for about 77% of policyholders. NFIP insures about 5 million households.
In response, Louisiana, Florida, Idaho, Kentucky, Mississippi, Montana, North Dakota, South Carolina, Texas and Virginia, along with dozens of Louisiana local governments and levee districts, have gone to court to fight Risk Rating 2.0. On September 14, a federal hearing for a preliminary injunction lasted six hours.
The lawsuit, filed June 1, alleges that FEMA’s changes “flout federal law, are arbitrary and capricious, and were enacted illegally.” The plaintiffs say FEMA has overstepped its authority and that its new pricing does not properly account for community flood mitigation efforts, such as the building of dams and levees.
“FEMA has congressional authority to make changes, but what we’re saying is that it’s not okay to make such dramatic changes to the program,” says Liz Murrill, the solicitor general for the state of Louisiana. “It’s so different that it’s causing people to drop out of flood insurance.”
Furthermore, Louisiana Attorney General Jeff Landry, who is leading the lawsuit, accuses FEMA of being secretive about its methodology to assess risk.
But Meg Galloway, a registered professional engineer and senior policy advisor for the Association of State Floodplain Managers, says the issue is not that simple. The reason for the lack of transparency, she notes, is that “much of the 2.0 rating engine relies on proprietary data models from the private sector.”
Politicians and Experts Clash on FEMA’s New Pricing Model
The average NFIP policy nationwide under the Risk Rating 2.0 model costs $1,808, a $920 jump from the previous average of $888.
However, not everyone will experience a rise in rates. Nationwide, 23% of policyholders would see immediate decreases in their premiums, according to FEMA.
“The overall feeling is that 2.0 is a very positive step in the right direction,” Galloway says. “With any new program, there’s always room for improvement.”
Cyndee Haydon, probate and trust real estate advisor and Chair of the National Association of Realtors Insurance Committee, says that the new model is a more accurate flood risk assessment that is crucial for homeowners and the economy.
“The legacy model…relied on just two pieces of information: elevation and flood zone. It wasn’t fair because it didn’t account for property value, where your house was actually located in a flood zone, materials and many other factors,” she says.
Haydon contends that this isn’t a scientific battle but a political one in which homeowners just don’t want to pay more, and politicians are going to bat for them.
Higher Costs Connected to Past—and Future—Weather
An increase in destructive storms and other extreme weather events believed to be linked to climate change is causing insurance companies to bail out of high-risk areas. As a federal agency, FEMA doesn’t have the option of excluding such areas from its coverage.
Over the past decade, the NFIP has lost more than $10 billion following major storms like Hurricanes Harvey, Maria and Irma.
The agency is aiming to price the risk properly so it can stay solvent. To do so, it says, it needed to update the legacy rating system. In the 1970s, when the old system was developed, catastrophe models were not available for insurance pricing.
FEMA has also moved to contain its costs by encouraging the federal and state governments to invest in infrastructure that would mitigate storm-related damage.
Gordon Dove, president of the Terrebonne Parish Consolidated Government, a plaintiff in the lawsuit, says that FEMA’s new risk model figures in events that haven’t happened instead of focusing on historical patterns.
“Let’s say you’ve been in a no-flood zone your whole life, paying $300 to $700 per year for flood insurance. This 2.0 risk model threw that away, so now you may be paying $6,000. And you’ve never flooded,” Dove says.
Where Prices Are Going Up, Where They’re Going Down
Forbes Advisor analyzed FEMA data to determine which areas would get the biggest rate hikes. These states topped the list for rate increases among a larger population:
- Florida
- Louisiana
- New Jersey
- North Carolina
- Texas
Most affected homeowners will face a bump of $10 or less for their NFIP premiums.
Meanwhile, in these places, many homeowners will see an immediate drop in their insurance costs:
- Arkansas
- Washington D.C.
- Maryland
- Missouri
- Utah
Some New Englanders will catch a big break with the new pricing model. In Rhode Island, Massachusetts and Connecticut, at least 15% of homeowners will see their insurance premiums decrease by $100 or more.
NFIP Tries to Soften the Blow
NFIP has made some provisions to ease homeowners into any insurance cost increases.
- For the first year of Risk Rating 2.0, FEMA has set an annual maximum premium of $12,125 for any single-family primary residence.
- Premium increases are capped at 18% per year for primary residences—a so-called “glide path” to guard against rate shock.
But FEMA by itself can only do so much. To lower prices, it needs assistance from Congress, which has dragged its feet on the matter for years. In April 2023, the Department of Homeland Security submitted 17 legislative proposals for reforming the NFIP, including affordable insurance options for low- to moderate-income homeowners. A bipartisan bill for NFIP reform was introduced over the summer but is in limbo.
“Rate hikes don’t just affect homeowners. People renting houses will get charged more,” Dove says. “This is affecting crab fishermen, oystermen, the people working in the shipyards. If they consider you in a flood zone, you have to get flood insurance.”
“And what happens if you can’t afford flood insurance? You may just lose your home,” he adds.
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