As the climate changes and temperatures rise, areas previously considered low risk for flooding may be more vulnerable. More intense storms and rainfall could lead to increased flood risk in many places that haven’t been known for flooding in the past.

In addition, changes are underway in how the Federal Emergency Management Agency (FEMA) underwrites flood insurance through the National Flood Insurance Program (NFIP). FEMA introduced Risk Rating 2.0 in 2021, and it was fully implemented in all policies as of April 2022. Risk Rating 2.0 assigns risk and calculates premiums based on each specific building rather than applying a blanket risk profile based on zones, and it has significantly increased premiums for many policies.

Given changing flood patterns and the changes to the NFIP marketplace, more property owners may turn to private insurers to help address potential flood exposure.

CHANGING WEATHER CREATES NEW FLOOD RISKS

On July 11, 2023, President Biden signed an Emergency Declaration for Vermont after heavy rain pounded the state for four days. The downpour led to “life-threatening” flooding that was worse than residents experienced in 2011 during Tropical Storm Irene. First responders and the National Guard ultimately conducted more than 100 rescues.³

New England isn’t typically viewed as a high-risk flood area. From 2000 through 2022, Maine ranked 43rd out of 50 states for number of NFIP flood claims. New Hampshire was 40th, and Vermont ranked 37th.⁵ However, most of the counties in New York were under a flood warning and a state of emergency in July 2023. The Mid-Hudson region of New York received more than eight inches of rain, and the Finger Lakes received more than five. Maine, Western Massachusetts, and Connecticut also experienced flooding.⁴

Over the past two years, flooding has also led to damage and even deaths in places like eastern Kentucky, Texas, Montana, Georgia, and Missouri. Each of those states experienced flooding in areas not designated as Special Flood Hazard Areas (SPHA) by FEMA, and fewer than 1 percent of homeowners in those areas have flood insurance.⁶

The challenge with assessing flood risk is that FEMA’s flood risk maps don’t forecast flooding. Instead, they assign risk based on past events. As the climate changes, FEMA flood maps may not be an accurate risk barometer. While the organization is required to update maps every five years, that target is rarely achieved. FEMA administrators have advised Congress that creating a new map takes at least seven years.⁶ During a recent Congressional hearing, former FEMA administrator W. Craig Fugate advised, “Climate has changed so much that the maps aren’t going to keep up for some time. They are not designed for extreme rainfall events.”⁶

RISK RATING 2.0: WHAT IT MEANS FOR INSURANCE COVERAGE

Since the 1970s, FEMA has relied on flood zone data to determine NFIP insurance premiums. The policy would likely have a higher premium if a home were in a high-risk zone, regardless of the property's specific characteristics.

Risk Rating 2.0 considers multiple factors when assessing a property’s flood risk, including:⁹

• WHERE the building is constructed. This assesses the property’s distance to water, the type of water body nearby, and the property’s elevation.
• HOW the property was constructed. This analyzes property characteristics like the foundation, the number of stories, the materials used in construction, and much more.
• WHAT is covered. This includes factors like the building replacement value, content value, and the policy deductible.

Risk Rating 2.0 has been gradually implemented over the past two years. Starting in October 2021, all new policies were underwritten based on Risk Rating 2.0 data. The data was then implemented in renewal policies starting in April 2022. As of April 2023, all NFIP policies are based on the new assessment system.¹⁰

NFIP RATE INCREASES AND OTHER MARKETPLACE CHALLENGES

Risk Rating 2.0 should create a more stable and reasonably priced flood insurance market in the long term. However, in the short term, it will lead to premium increases for many. According to NFIP, premiums for more than 75% of policyholders will go up.¹¹

The increases for NFIP policies are driven by the new risk system, but they’re also driven by the NFIP’s ongoing budget issues. The NFIP has run shortfalls for years. In 2017 alone, the program lost over $10 billion. It is currently carrying over $20 billion in debt, and in 2022, paid over $280 million in interest.¹² Program changes have been proposed, but there no guarantee that those proposals would reduce premiums.

Finally, NFIP policies cap coverage. For residential buildings with one-to-four units, there’s a limit of $250,000 available for property damage and $100,000 for contents. For non-condo residential buildings with more than four units, limits are capped of $500,000 for damage and $100,000 for contents. Commercial buildings have a total coverage cap of $500,000.¹³ In an extreme flooding scenario, those coverage limits may be woefully insufficient when you consider that just one inch of water in a structure can cause up to $25,000 in damage.¹⁴ It’s easy to see how a substantial flood can create damage that far exceeds the NFIP coverage limits.

NEW OPPORTUNITIES IN PRIVATE FLOOD MARKET

For a variety of reasons, from changing weather patterns to NFIP rating adjustments, the flood market is in a period of transition. Just as the NFIP is using technology to better gauge risk, so too are private insurers. Property owners may find that there is more stable pricing and adequate coverage available in the private market. The private flood insurance market is becoming more competitive and those in non-coastal areas will likely find multiple coverage options available. Coastal areas are still challenging but there are options available in that market as well. Those who already have NFIP coverage may need more than the NFIP allows. Private policies can help bridge the gap to fully insure a property.

BOTTOM LINE

As weather patterns continue to change, so too will the flood insurance market. Retail agents can best serve their clients by making them aware of the changing weather patterns and their impact on flood risks during annual coverage review discussions. Partnering with an experienced and knowledgeable wholesale broker can also help ensure you’re aware of all available coverage options as your clients strive to address the risks of climate change.

With state-of-the-art proprietary technology and unique offerings, CRC's flood program is one of the best in the country. Over the last six years, it has delivered consistent, stable results making it a strong core option outside the NFIP. It's simple to navigate and leverages both available data and modeling technology to provide quotes from multiple carriers with only one submission. Contact your CRC Group producer today to discuss how we can help protect your clients against the devastating impacts of flood damage.

CONTRIBUTORS

• Ben Tschepikow is a Broker with Argenia, a CRC Group Company located in Little Rock, AR, and is a member of the Personal Lines Practice Advisory Committee.

END NOTES

1. Spotlight on: Flood Insurance, Insurance Information Institute, December 6, 2022. https://www.iii.org/article/spotlight-on-flood-insurance
2. Flood Insurance, Ohio Committee for Severe Weather Awareness. https://weathersafety.ohio.gov/FloodInsuranceInfo_SprSum.aspx
3. Vermont floods have led to more than 100 rescues, officials say, NBC News, July 11, 2023. https://www.nbcnews.com/news/us-news/live-blog/ floods-vermont-weather-rain-storms-new-england-live-updates-rcna93587
4. Heavy rains produce major floods in Vermont, New York, and other parts of the northeast, NPR, July 11, 2023. https://www.npr.org/2023/07/11/1187012088/floods-vermont-new-york-new-england
5. Historical NFIP Claims Information and Trends, Floodsmart. https://www.floodsmart.gov/historical-nfip-claims-information-and-trends
6. America Underwater, Washington Post, December 6, 2022. https://www.washingtonpost.com/climate-environment/interactive/2022/fema-flood-risk-maps-failures/
7. Observed and Projected Change in Heavy Precipitation, National Climate Assessment, 2018. https://nca2018.globalchange.gov/chapter/2/#fig-2-6
8. Why Do I Need Flood Insurance?, FEMA, July 2021. https://agents.floodsmart.gov/sites/default/files/FEMA_Why-Do-I-Need-Flood-Insurance_Brochure_2021.pdf
9. Rate Explanation Guide, Floodsmart, March 2022. https://agents.floodsmart.gov/sites/default/files/fema-risk-rating-rate-explanation-guide.pdf
10. Risk Rating 2.0: Equity in Action, FEMA, June 5, 2023. https://www.fema.gov/flood-insurance/risk-rating
11. Risk Rating 2.0: Projected Premium Changes by Zip Code - All NFIP Policies, ASFPM Flood Science Center, 2021. https://www.arcgis.com/apps/dashboards/ad25fc43b31e46e6a66a4c632d6746f6
12. NFIP Debt, FEMA, November 4, 2022. https://www.fema.gov/case-study/nfip-debt
13. NFIP Coverage Limits, FEMA. https://emilms.fema.gov/is_1101b/groups/74.html
14. The cost of flooding, Floodsmart, 2022. https://www.floodsmart.gov/cost-flooding