Most residents living on the coast or near the water are familiar with flood insurance. The most common type of flood insurance policy is currently provided by FEMA’s National Flood Insurance Program (NFIP) when a home has a mortgage and is located in the 100-year floodplain.
Homeowners can also buy flood insurance in the 500-year floodplain at a reduced rate. Both are good investments. The premiums are based on whether or not the home was grandfathered into the system (built before the effective flood maps), is mitigated for floods (e.g., elevated) and is expected to receive storm surge or wave action during a storm event. As of 2018, the NFIP provides more than 5 million flood policies, representing nearly $1.28 trillion in coverage.
Flood risk models create insurance premium costs and local plans
To date, FEMA models flood risk throughout the country using supercomputers to simulate storm events. Up to 50,000 storms from all different directions and intensity can be modeled! Once the data is compiled, the modelers calculate averages in water levels and velocity to compute the total risk that flooding presents. This information is then used to create a floodplain, which then identifies the 100-year and 500-year flood zones and associated flood maps, and inform the insurance premiums for property owners.
Insurance agents must then process paperwork, sometimes requiring an Elevation Certificate, and send it to a FEMA office for pricing. The zones are used for equally important purposes by the local community and state officials, hazard risk analysis, mitigation practices, planning, zoning and ordinances. For instance, if a planned property is in the 100-year flood zone, then the local community may require that the property is built to a specific height through its local floodplain management ordinance or building code.
Private sector flood modeling has advanced in recent years
Due to advances in data, computing power and funding, private-sector hazard modelers have been able to assess flood risk and the associated costs from storm events at the property or parcel level for years.
Insurance companies use this information to provide flood insurance policies without the backing of FEMA or the NFIP. This model of providing an insurance policy is similar to that of wind, fire, liability, etc., that consumers are used to. This new movement in the insurance industry is catching steam, as some states like Florida have seen the uptake in flood policies nearly double in just the past 2 years.
Even so, the Wharton School of Business’s Risk Management and Decision Processes Center estimates that the private flood insurance market accounts of only 2.5 to 4.5 percent of all residential flood policies currently purchased. Wharton also estimates that the U.S. flood market can provide $30 billion to $50 billion in coverage with the private market growth.
FEMA launches “Risk Rating 2.0”
In March 2019, FEMA announced the transformation of the NFIP through Risk Rating 2.0, a system that will “fundamentally change the way FEMA rates a property’s flood risk and prices insurance.” This new approach to identify flood risk and to more accurately price flood insurance premiums is due to FEMA leveraging private-sector best practices and current technology.
This means the NFIP will be allowed to assess the insurance cost at the individual property level, verses in a designated flood zone. So, when a property owner asks their insurance agent for a new policy, that agent can simply type in an address and instantly get a quote.
The new rates are expected to take effect in October 2020.