National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0

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National Flood Insurance Program: The
~~June 4~~November 2, 2021 , 2021
Current Rating Structure and Risk Rating 2.0
Diane P. Horn
The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage
Analyst in Flood Insurance Analyst in Flood Insurance
for residential properties in the United States, with more than for residential properties in the United States, with more than ~~five~~5 million policies in over 22,000 million policies in over 22,000
and Emergency and Emergency
communities in 56 states and jurisdictions. FEMA is communities in 56 states and jurisdictions. FEMA is ~~planning to introduce~~in the process of introducing the biggest the biggest ~~change to~~
Management Management
change to the way the NFIP calculates flood insurance premiums, known as Risk Rating 2.0, the way the NFIP calculates flood insurance premiums, known as Risk Rating 2.0, ~~since the~~

since the inception of the NFIP in 1968. The new premium rates inception of the NFIP in 1968. The new premium rates ~~are scheduled to go~~went into effect on October into effect on October
1, 2021, for new NFIP policies only. The new rates for existing NFIP policyholders are to take 1, 2021, for new NFIP policies only. The new rates for existing NFIP policyholders are to take

effect on April 1, 2022. effect on April 1, 2022.
Risk Rating 2.0 will continue the overall policy of phasing out NFIP subsidies, which began with the Biggert-Waters Flood Risk Rating 2.0 will continue the overall policy of phasing out NFIP subsidies, which began with the Biggert-Waters Flood
Insurance Reform Act of 2012 and continued with the Homeowner Flood Insurance Affordability Act of 2014. Under the Insurance Reform Act of 2012 and continued with the Homeowner Flood Insurance Affordability Act of 2014. Under the
change, premiums for individual properties will be tied to their actual flood risk. Because the limitations on annual premium change, premiums for individual properties will be tied to their actual flood risk. Because the limitations on annual premium
increases are set in statute, Risk Rating 2.0 will not be able to increase rates faster than the existing limit for primary increases are set in statute, Risk Rating 2.0 will not be able to increase rates faster than the existing limit for primary
residences of 5%-18% increase per year. residences of 5%-18% increase per year.
According to FEMA, Risk Rating 2.0 will According to FEMA, Risk Rating 2.0 will
 reflect an individual property’s risk,  reflect an individual property’s risk,
 reflect more types of flood risk in rates,  reflect more types of flood risk in rates,
 use the latest actuarial practices to set risk-based rates,  use the latest actuarial practices to set risk-based rates,
 provide rates that are easier to understand for agents and policyholders, and  provide rates that are easier to understand for agents and policyholders, and
 reduce complexity for agents to generate a flood insurance quote.  reduce complexity for agents to generate a flood insurance quote.
The NFIP’s current rating structure follows general insurance practices in effect at the time that the NFIP was established and The NFIP’s current rating structure follows general insurance practices in effect at the time that the NFIP was established and
has not fundamentally changed since the 1970s. The current NFIP rating structure uses several basic characteristics to has not fundamentally changed since the 1970s. The current NFIP rating structure uses several basic characteristics to
classify properties based on flood risks. Structures are evaluated by their flood zone on a Flood Insurance Rate Map (FIRM), classify properties based on flood risks. Structures are evaluated by their flood zone on a Flood Insurance Rate Map (FIRM),
occupancy type, and the elevation of the structure. FEMA uses a nationwide rating system that combines flood zones across occupancy type, and the elevation of the structure. FEMA uses a nationwide rating system that combines flood zones across
many geographic areas, and calculates expected losses for groups of structures that are similar in flood risk and key structural many geographic areas, and calculates expected losses for groups of structures that are similar in flood risk and key structural
aspects, assigning the same rate to all policies in a group. aspects, assigning the same rate to all policies in a group.
According to FEMA, flood zones will no longer be used in calculating a property’s flood insurance premium following the According to FEMA, flood zones will no longer be used in calculating a property’s flood insurance premium following the
introduction of Risk Rating 2.0. Instead, the premium will be calculated based on the specific features of an individual introduction of Risk Rating 2.0. Instead, the premium will be calculated based on the specific features of an individual
property, including structural variables such as the foundation type of the structure, the height of the lowest floor of the property, including structural variables such as the foundation type of the structure, the height of the lowest floor of the
structure relative to base flood elevation, and the replacement cost value of the structure. The current rating system includes structure relative to base flood elevation, and the replacement cost value of the structure. The current rating system includes
two sources of flood risk: the 1%-annual-chance fluvial (river) flood and the 1%-annual-chance coastal flood. two sources of flood risk: the 1%-annual-chance fluvial (river) flood and the 1%-annual-chance coastal flood. ~~As proposed,~~
Risk Rating 2.0 will incorporate a broader range of flood frequencies and sources than the current system, as well as Risk Rating 2.0 will incorporate a broader range of flood frequencies and sources than the current system, as well as
geographical variables such as the distance to water, the type and size of nearest bodies of water,geographical variables such as the distance to water, the type and size of nearest bodies of water, flood frequency and the elevation of the and the elevation of the
property relative to the flooding source. property relative to the flooding source.
According to FEMA, although flood zones on a FIRM will not be used to calculate a property’s flood insurance premium, According to FEMA, although flood zones on a FIRM will not be used to calculate a property’s flood insurance premium,
flood zones will still be used for floodplain management purposes, and the boundary of the Special Flood Hazard Area will flood zones will still be used for floodplain management purposes, and the boundary of the Special Flood Hazard Area will
still be required for the mandatory purchase requirement. still be required for the mandatory purchase requirement.

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National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0

Introduction
The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage The National Flood Insurance Program (NFIP) is the primary source of flood insurance coverage
for residential properties in the United States, with more than for residential properties in the United States, with more than ~~five~~5 million policies in 22,500 million policies in 22,500
communities in 56 states and jurisdictions. The program collects about $4.6 billion in annual communities in 56 states and jurisdictions. The program collects about $4.6 billion in annual
revenue from policyholders’ premiums, fees and surcharges and provides over $1.3 trillion in revenue from policyholders’ premiums, fees and surcharges and provides over $1.3 trillion in
coverage.1 The NFIP was established by the National Flood Insurance Act of 1968.2 The general coverage.1 The NFIP was established by the National Flood Insurance Act of 1968.2 The general
purpose of the NFIP is both to offer primary flood insurance to properties with significant flood purpose of the NFIP is both to offer primary flood insurance to properties with significant flood
risk, and to reduce flood risk through the adoption of floodplain management standards. A longer-risk, and to reduce flood risk through the adoption of floodplain management standards. A longer-
term objective of the NFIP is to reduce federal expenditure on disaster assistance after floods.3 term objective of the NFIP is to reduce federal expenditure on disaster assistance after floods.3
The Federal Emergency Management Agency (FEMA), which administers the NFIP, is planning The Federal Emergency Management Agency (FEMA), which administers the NFIP, is planning
to introduce Risk Rating 2.0, which represents the biggest change to the way the NFIP calculates to introduce Risk Rating 2.0, which represents the biggest change to the way the NFIP calculates
flood insurance premiums since its inception.4 The new premium rates flood insurance premiums since its inception.4 The new premium rates ~~are scheduled to go~~went into into
effect on October 1, 2021, for new NFIP policies only. The new rates for existing NFIP effect on October 1, 2021, for new NFIP policies only. The new rates for existing NFIP
policyholders are to take effect on April 1, 2022.5 policyholders are to take effect on April 1, 2022.5
The price of insurance is generally based on three components: (1) the average annual loss, which The price of insurance is generally based on three components: (1) the average annual loss, which
is the expected loss per year; (2) the risk, which depends on the variability or uncertainty in loss is the expected loss per year; (2) the risk, which depends on the variability or uncertainty in loss
estimates; and (3) expenses. These rating factors are used to calculate the premium that is estimates; and (3) expenses. These rating factors are used to calculate the premium that is
sufficient to cover expected losses.6 The methodologies used to estimate these components, sufficient to cover expected losses.6 The methodologies used to estimate these components,
particularly the average annual loss and the risk, have changed over the decades that the NFIP has particularly the average annual loss and the risk, have changed over the decades that the NFIP has
been in operation. This report will outline how the NFIP currently rates risks and sets premiums been in operation. This report will outline how the NFIP currently rates risks and sets premiums
to cover losses, and how these are expected to change with the introduction of Risk Rating 2.0.to cover losses, and how these are expected to change with the introduction of Risk Rating 2.0.7
The NFIP’s Current Rating Structure
How the NFIP Currently Determines Flood Insurance Premiums
The NFIP’s current rating structure follows general insurance practices in effect at the time that The NFIP’s current rating structure follows general insurance practices in effect at the time that
the NFIP was established and has not fundamentally changed since the 1970s.the NFIP was established and has not fundamentally changed since the 1970s.78 The current NFIP The current NFIP
rating structure uses several basic characteristics to classify properties based on flood risks. rating structure uses several basic characteristics to classify properties based on flood risks.
Structures are evaluated by their specific flood Structures are evaluated by their specific flood ~~zone8~~zone9 on a Flood Insurance Rate Map (FIRM), on a Flood Insurance Rate Map (FIRM),

1 Federal Emergency Management Agency (FEMA), 1 Federal Emergency Management Agency (FEMA), Watermark, FY2021, ~~First~~Second Quarter, Vol. 14, at https://www.fema.gov/, at https://www.fema.gov/
sites/default/files/documents/sites/default/files/documents/~~fema_watermark-report_12-2020~~fema_fima-watermark-fy21-q2.pdf. .pdf.
2 Title XIII of P.L. 90-448, as amended, 42 U.S.C. §4001 et seq. 2 Title XIII of P.L. 90-448, as amended, 42 U.S.C. §4001 et seq.
3 The National Flood Insurance Program (NFIP) is discussed in more detail in CRS Report R44593, 3 The National Flood Insurance Program (NFIP) is discussed in more detail in CRS Report R44593, Introduction to the
National Flood Insurance Program (NFIP), by Diane P. Horn and Baird Webel. , by Diane P. Horn and Baird Webel.
4 See FEMA, 4 See FEMA, Risk Rating 2.0: Equity in Action, , at https://www.fema.gov/flood-insurance/https://www.fema.gov/flood-insurance/~~work-with-nfip/~~risk-rating. risk-rating.
5 Ibid. 5 Ibid.
6 American Academy of Actuaries, 6 American Academy of Actuaries, Uses of Catastrophe Model Output, Washington, DC, July 2018, pp. 11-16, at , Washington, DC, July 2018, pp. 11-16, at
https://www.actuary.org/sites/default/files/files/publications/Catastrophe_Modeling_Monograph_07.25.2018.pdf. https://www.actuary.org/sites/default/files/files/publications/Catastrophe_Modeling_Monograph_07.25.2018.pdf.
7 7 See also CRS Insight IN11777, National Flood Insurance Program Risk Rating 2.0: Frequently Asked Questions, by Diane P. Horn. 8 FEMA, FEMA, Risk Rating 2.0: Equity in Action, at https://www.fema.gov/flood-insurance/work-with-nfip/risk-rating. , at https://www.fema.gov/flood-insurance/work-with-nfip/risk-rating.
89 Flood zones are geographic areas that FEMA has defined according to levels of flood risk and are depicted on a Flood zones are geographic areas that FEMA has defined according to levels of flood risk and are depicted on a
community’s Flood Insurance Rate Map (FIRM). NFIP flood zones can be divided into three main categories: low to community’s Flood Insurance Rate Map (FIRM). NFIP flood zones can be divided into three main categories: low to
moderate risk areas (zones B, C, and X zones), high risk areas (A zones), and high risk coastal areas (V zones). For a moderate risk areas (zones B, C, and X zones), high risk areas (A zones), and high risk coastal areas (V zones). For a
more detailed explanation of flood zones, see CRS Report R44593, more detailed explanation of flood zones, see CRS Report R44593, Introduction to the National Flood Insurance
~~Program (NFIP), by Diane P. Horn and Baird Webel.~~
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occupancy type, occupancy type,910 and the elevation of the structure relative to the Base Flood Elevation (BFE). and the elevation of the structure relative to the Base Flood Elevation (BFE).1011
In addition, the premium structure includes estimates for the expenses of the NFIP, including In addition, the premium structure includes estimates for the expenses of the NFIP, including
servicing of policies. servicing of policies.
FEMA uses a nationwide rating system that combines flood zones across many geographic areas. FEMA uses a nationwide rating system that combines flood zones across many geographic areas.
Individual policies do not necessarily reflect topographical features that affect flood risk. FEMA Individual policies do not necessarily reflect topographical features that affect flood risk. FEMA
calculates expected losses for groups of structures that are similar in flood risk and key structural calculates expected losses for groups of structures that are similar in flood risk and key structural
aspects, and assigns the same rate to all policies in a group. For example, two properties that are aspects, and assigns the same rate to all policies in a group. For example, two properties that are
rated as the same NFIP risk (e.g., both are one-story, single-family rated as the same NFIP risk (e.g., both are one-story, single-family ~~dwellings11~~dwellings12 with no basement, with no basement,
in the same flood zone, and elevated the same number of feet above the BFE), are charged the in the same flood zone, and elevated the same number of feet above the BFE), are charged the
same rate per $100 of insurance, although they may be located in different states with differing same rate per $100 of insurance, although they may be located in different states with differing
flood histories or rest on different topography, such as a shallow floodplain as opposed to a steep flood histories or rest on different topography, such as a shallow floodplain as opposed to a steep
river valley.river valley.1213 In addition, two properties in the same flood zone are charged the same rate, In addition, two properties in the same flood zone are charged the same rate,
regardless of their location within the zone. regardless of their location within the zone.
Risk Modeling
FEMA’s current efforts to model risk consider only the potential for coastal storm surge and FEMA’s current efforts to model risk consider only the potential for coastal storm surge and
fluvial (river) flooding. The NFIP expresses flood risk in terms of the expected economic loss due fluvial (river) flooding. The NFIP expresses flood risk in terms of the expected economic loss due
to inundation and the probability of that loss. Information about the flood hazard is determined to inundation and the probability of that loss. Information about the flood hazard is determined
through NFIP flood studies, the vulnerability of the structure being insured, and the performance through NFIP flood studies, the vulnerability of the structure being insured, and the performance
of certain flood protection measures.of certain flood protection measures.1314 This is incorporated into a flood risk assessment, which This is incorporated into a flood risk assessment, which
yields an estimate of the average annual loss. The insurance rate is determined from this loss after yields an estimate of the average annual loss. The insurance rate is determined from this loss after
adjusting for expenses, deductibles, underinsurance (because not all structures are insured to their adjusting for expenses, deductibles, underinsurance (because not all structures are insured to their
full value), and other factors.full value), and other factors.1415

9Program (NFIP), by Diane P. Horn and Baird Webel. 10 The NFIP occupancy types are single family, 2-4 family, other residential, The NFIP occupancy types are single family, 2-4 family, other residential, ~~non-residential~~nonresidential business, or other business, or other ~~non-~~
~~residential~~nonresidential. For further detail, see FEMA, . For further detail, see FEMA, Flood Insurance Manual, 3. How to Write, pp. 3-10 to 3-12, revised April , pp. 3-10 to 3-12, revised April
2021, at https://www.fema.gov/sites/default/files/documents/fema_fim-3-how-to-write_apr2021.pdf. 2021, at https://www.fema.gov/sites/default/files/documents/fema_fim-3-how-to-write_apr2021.pdf.
1011 The Base Flood Elevation (BFE) is the water-surface elevation of the base flood, which is the 1%-annual-chance The Base Flood Elevation (BFE) is the water-surface elevation of the base flood, which is the 1%-annual-chance
flood, commonly called the 100-year flood. The probability is 1% that rising water will reach BFE height in any given flood, commonly called the 100-year flood. The probability is 1% that rising water will reach BFE height in any given
year. year.
1112 The NFIP defines a single-family dwelling as either a residential single-family building in which the total floor area The NFIP defines a single-family dwelling as either a residential single-family building in which the total floor area
devoted to devoted to ~~non-residential~~nonresidential uses is less than 50% of the building’s total flood area, or a single-family residential unit uses is less than 50% of the building’s total flood area, or a single-family residential unit
within a 2-4 family building, other-residential building, business, or within a 2-4 family building, other-residential building, business, or ~~non-residential~~nonresidential building, in which commercial uses building, in which commercial uses
within the unit are limited to less than 50% of the unit’s total floor area. See https://www.fema.gov/node/405338. within the unit are limited to less than 50% of the unit’s total floor area. See https://www.fema.gov/node/405338.
1213 U.S. Government Accountability Office (GAO), U.S. Government Accountability Office (GAO), Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention, ,
GAO-09-12, October 2008, p. 23, at https://www.gao.gov/assets/290/283035.pdf. GAO-09-12, October 2008, p. 23, at https://www.gao.gov/assets/290/283035.pdf.
1314 The NFIP describes the performance of levees and other flood control structures by comparing the properties of these The NFIP describes the performance of levees and other flood control structures by comparing the properties of these
measures to design and operation standards. In FEMA’s terminology, an accredited levee is one that FEMA has shown measures to design and operation standards. In FEMA’s terminology, an accredited levee is one that FEMA has shown
on a FIRM as providing flood risk reduction from at least the 1%-annual-chance flood. A levee cannot be accredited on a FIRM as providing flood risk reduction from at least the 1%-annual-chance flood. A levee cannot be accredited
until the certification process is complete. Certification is the process that deals with the design and physical condition until the certification process is complete. Certification is the process that deals with the design and physical condition
of the levee. Certification consists of documentation, signed and sealed by a registered professional engineer, that the of the levee. Certification consists of documentation, signed and sealed by a registered professional engineer, that the
levee meets the requirements of 44 C.F.R §65.10; in other words, that the levee meets federal design, construction, levee meets the requirements of 44 C.F.R §65.10; in other words, that the levee meets federal design, construction,
maintenance, and operational standards to adequately reduce the risk of flooding from a 1%-annual-chance flood. If a maintenance, and operational standards to adequately reduce the risk of flooding from a 1%-annual-chance flood. If a
levee meets these standards, it is considered to provide protection from the 1%-annual-chance flood as well as floods levee meets these standards, it is considered to provide protection from the 1%-annual-chance flood as well as floods
with lesser velocities, water surface elevations, and discharge rates. Non-accredited levee systems are levee systems with lesser velocities, water surface elevations, and discharge rates. Non-accredited levee systems are levee systems
that do not meet all the requirements along the entire length of the levee system. See FEMA, that do not meet all the requirements along the entire length of the levee system. See FEMA, Guidance for Flood Risk
Analysis and Mapping: Levees, November 2019, at https://www.fema.gov/sites/default/files/2020-02/, November 2019, at https://www.fema.gov/sites/default/files/2020-02/
Levee_Guidance_Nov_2019_v2.pdf. Levee_Guidance_Nov_2019_v2.pdf.
1415 National Research Council, National Research Council, Tying Flood Insurance to Flood Risk for Low-Lying Structures in the Floodplain, ,
Washington, DC, 2015, pp. 1-4, at https://www.nap.edu/catalog/21720/tying-flood-insurance-to-flood-risk-for-low-Washington, DC, 2015, pp. 1-4, at https://www.nap.edu/catalog/21720/tying-flood-insurance-to-flood-risk-for-low-
~~lying-structures-in-the-floodplain.~~
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In inland areas, NFIP flood studies focus on a river’s watershed, the topography along the river In inland areas, NFIP flood studies focus on a river’s watershed, the topography along the river
and adjacent floodplain where structures are located, and the hydraulic characteristics of the river and adjacent floodplain where structures are located, and the hydraulic characteristics of the river
and floodplain.and floodplain.1516 In coastal areas, the studies also assess the effects of storm surge and wave In coastal areas, the studies also assess the effects of storm surge and wave
action. Models of relevant physical processes are coupled with statistical models of weather action. Models of relevant physical processes are coupled with statistical models of weather
events to compute flood depths and velocities, and their likelihood of occurring. The model events to compute flood depths and velocities, and their likelihood of occurring. The model
prediction results are summarized in reports and portrayed on FIRMs which show water surface prediction results are summarized in reports and portrayed on FIRMs which show water surface
elevations, floodplain boundaries, and flood zones. elevations, floodplain boundaries, and flood zones.
An area of specific focus on the FIRM is the Special Flood Hazard Area (SFHA). An area of specific focus on the FIRM is the Special Flood Hazard Area (SFHA).1617 Properties in Properties in
an SFHA are subject to the mandatory purchase requirement, which requires owners of properties an SFHA are subject to the mandatory purchase requirement, which requires owners of properties
in the mapped SFHA, in a community that participates or has participated in the NFIP, to in the mapped SFHA, in a community that participates or has participated in the NFIP, to
purchase flood insurance as a condition of receiving a federally backed mortgage.purchase flood insurance as a condition of receiving a federally backed mortgage.1718 Within the Within the
SFHA, there are two broad flood zones, the A SFHA, there are two broad flood zones, the A ~~zone18~~zone19 and the V zone. and the V zone.1920 V zones are distinguished V zones are distinguished
from A zones in that V zones are subject to wave action (i.e., coastal flooding). from A zones in that V zones are subject to wave action (i.e., coastal flooding).
Geographical and Structural Variables
To calculate the premium, the current rating system considers the flood zone, the building To calculate the premium, the current rating system considers the flood zone, the building
occupancy type, the foundation type, the number of floors, the presence or not of a basement, occupancy type, the foundation type, the number of floors, the presence or not of a basement,
whether the property is entitled to a subsidy, whether or not the property is a primary residence, whether the property is entitled to a subsidy, whether or not the property is a primary residence,
prior claims, and the structure’s elevation relative to the BFE. The amount of coverage and the prior claims, and the structure’s elevation relative to the BFE. The amount of coverage and the
deductible will also affect the premium. deductible will also affect the premium.
Premium Subsidies and Cross-Subsidies
Except for certain subsidies, flood insurance rates in the NFIP are directed to be “based on Except for certain subsidies, flood insurance rates in the NFIP are directed to be “based on
consideration of the risk involved and accepted actuarial principles,”consideration of the risk involved and accepted actuarial principles,”2021 meaning that the rate is meaning that the rate is
reflective of the true flood risk to the property. FEMA determines full-risk reflective of the true flood risk to the property. FEMA determines full-risk ~~rates21~~rates22 by estimating by estimating
the probability of a given level of flooding, damage estimates based on that level of flooding, and the probability of a given level of flooding, damage estimates based on that level of flooding, and
accepted actuarial principles.accepted actuarial principles.2223 However, Congress has directed FEMA However, Congress has directed FEMA not to charge actuarial to charge actuarial
rates for certain categories of properties and to offer rates for certain categories of properties and to offer ~~subsidies23~~subsidies24 or cross-subsidies to certain or cross-subsidies to certain

15lying-structures-in-the-floodplain. 16 Ibid., p. 15. Ibid., p. 15.
1617 A Special Flood Hazard Area (SFHA) is defined by FEMA as an area with a 1% or greater risk of flooding every A Special Flood Hazard Area (SFHA) is defined by FEMA as an area with a 1% or greater risk of flooding every
year. year.
1718 For further information on the mandatory purchase requirement, see https://www.fema.gov/node/404832, and CRS For further information on the mandatory purchase requirement, see https://www.fema.gov/node/404832, and CRS
Report R44593, Report R44593, Introduction to the National Flood Insurance Program (NFIP), by Diane P. Horn and Baird Webel. , by Diane P. Horn and Baird Webel.
1819 FEMA defines the A Zone as areas subject to inundation by the 1%-annual-chance flood. Zone A is in the SFHA. FEMA defines the A Zone as areas subject to inundation by the 1%-annual-chance flood. Zone A is in the SFHA.
See FEMA, See FEMA, Zone A, at https://www.fema.gov/glossary/zone. , at https://www.fema.gov/glossary/zone.
1920 FEMA defines the V zone as areas along coasts subject to inundation by the 1%-annual-chance flood with additional FEMA defines the V zone as areas along coasts subject to inundation by the 1%-annual-chance flood with additional
hazards associated with storm-induced waves. FEMA, hazards associated with storm-induced waves. FEMA, Zone V, at https://www.fema.gov/glossary/zone-v. , at https://www.fema.gov/glossary/zone-v.
2021 42 U.S.C. §4014(a)(1). 42 U.S.C. §4014(a)(1).
2122 FEMA defines full-risk rates as those charged to a group of policies that generate premiums sufficient to pay the FEMA defines full-risk rates as those charged to a group of policies that generate premiums sufficient to pay the
group’s anticipated losses and expenses. See GAO, group’s anticipated losses and expenses. See GAO, National Flood Insurance Program: Continued Progress Needed to
Fully Address Prior GAO Recommendations on Rate-Setting Methods, GAO-16-59, March 2016, p. 8, at , GAO-16-59, March 2016, p. 8, at
http://www.gao.gov/assets/680/675855.pdf. http://www.gao.gov/assets/680/675855.pdf.
2223 For a brief explanation of accepted actuarial principles, see National Research Council of the National Academies, For a brief explanation of accepted actuarial principles, see National Research Council of the National Academies,
Affordability of National Flood Insurance Program Premiums: Report 1, 2015, pp. 36-38, at http://www.nap.edu/, 2015, pp. 36-38, at http://www.nap.edu/
catalog/21709/affordability-of-national-flood-insurance-program-premiums-report-1. catalog/21709/affordability-of-national-flood-insurance-program-premiums-report-1.
2324 FEMA defines subsidized premium rates as those charged for a group of policies that results in aggregate premiums FEMA defines subsidized premium rates as those charged for a group of policies that results in aggregate premiums
~~insufficient to pay for anticipated losses and expenses.~~
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classes of properties in order to achieve the program’s objectives so that that owners of certain classes of properties in order to achieve the program’s objectives so that that owners of certain
existing properties in flood zones are able to afford flood insurance. There are three main existing properties in flood zones are able to afford flood insurance. There are three main
categories of properties which pay less than full risk-based rates: categories of properties which pay less than full risk-based rates:
1. Those built or substantially 1. Those built or substantially ~~improved24~~improved25 before FEMA published the first post- before FEMA published the first post-
1974 flood insurance rate map (FIRM); 1974 flood insurance rate map (FIRM);
2. Most properties newly mapped into a SFHA on or after April 1, 2015, if the 2. Most properties newly mapped into a SFHA on or after April 1, 2015, if the
applicant gets flood insurance coverage within a year of the mapping; and applicant gets flood insurance coverage within a year of the mapping; and
3. Those that had flood insurance on the property that complied with a prior FIRM, 3. Those that had flood insurance on the property that complied with a prior FIRM,
but the property was remapped into a different rate class (a practice known as but the property was remapped into a different rate class (a practice known as
“grandfathering”). “grandfathering”).
Pre-FIRM Subsidy
Pre-FIRM properties are those which were built or substantially improved before December 31, Pre-FIRM properties are those which were built or substantially improved before December 31,
1974, or before FEMA published the first FIRM for their community, whichever was later.1974, or before FEMA published the first FIRM for their community, whichever was later.2526 By By
statute, premium rates charged on structures built before they were first mapped into a flood zone statute, premium rates charged on structures built before they were first mapped into a flood zone
that have not been substantially improved, known as pre-FIRM structures,that have not been substantially improved, known as pre-FIRM structures,2627 are allowed to have are allowed to have
lower premiums than what would be expected to cover predicted claims. The availability of this lower premiums than what would be expected to cover predicted claims. The availability of this
pre-FIRM subsidy was intended to allow preexisting floodplain properties to contribute in some pre-FIRM subsidy was intended to allow preexisting floodplain properties to contribute in some
measure to pre-funding their recovery from a flood disaster instead of relying solely on federal measure to pre-funding their recovery from a flood disaster instead of relying solely on federal
disaster assistance. In essence, flood insurance could distribute some of the financial burden disaster assistance. In essence, flood insurance could distribute some of the financial burden
among those protected by flood insurance and the public. As of September 2018, approximately among those protected by flood insurance and the public. As of September 2018, approximately
13% of NFIP policies received a pre-FIRM subsidy.13% of NFIP policies received a pre-FIRM subsidy.2728 (Note that FEMA has not collected updated (Note that FEMA has not collected updated
information for rating categories since producing the September 2018 numbers.) Historically, the information for rating categories since producing the September 2018 numbers.) Historically, the
total number of pre-FIRM policies is relatively stable, but the percentage of those policies by total number of pre-FIRM policies is relatively stable, but the percentage of those policies by
comparison to the total policy base has decreased.comparison to the total policy base has decreased.2829
Newly Mapped Subsidy
The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA)The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA)2930 established a new established a new
~~subsidy30~~subsidy31 for properties that are newly mapped into a SFHA on or after April 1, 2015, if the for properties that are newly mapped into a SFHA on or after April 1, 2015, if the
applicant obtains coverage that is effective within 12 months of the map revision date. Certain applicant obtains coverage that is effective within 12 months of the map revision date. Certain
properties may be excluded based on their loss history.properties may be excluded based on their loss history.3132 The rate for eligible newly mapped The rate for eligible newly mapped

24insufficient to pay for anticipated losses and expenses. 25 44 C.F.R §59.1 defines “substantial improvement” as any reconstruction, rehabilitation, addition, or other 44 C.F.R §59.1 defines “substantial improvement” as any reconstruction, rehabilitation, addition, or other
improvement of a structure, the cost of which exceeds 50% of the market value of the structure before the start of improvement of a structure, the cost of which exceeds 50% of the market value of the structure before the start of
construction of the improvement. For additional discussion of substantial improvement, see FEMA, construction of the improvement. For additional discussion of substantial improvement, see FEMA, Substantial
Improvement, at https://www.fema.gov/node/405414. , at https://www.fema.gov/node/405414.
2526 42 U.S.C. §4015(c). 42 U.S.C. §4015(c).
2627 See FEMA, See FEMA, Pre-FIRM Building, at https://www.fema.gov/glossary/pre-firm-building. , at https://www.fema.gov/glossary/pre-firm-building.
2728 Email correspondence from FEMA Congressional Affairs staff, June 13, 2019. Email correspondence from FEMA Congressional Affairs staff, June 13, 2019.
2829 For an historical prospective on the percentages of subsidized policies in the NFIP, see GAO, For an historical prospective on the percentages of subsidized policies in the NFIP, see GAO, Flood Insurance: More
Information Needed on Subsidized Properties, GAO-13-607, July 2013, p. 7, at http://www.gao.gov/assets/660/, GAO-13-607, July 2013, p. 7, at http://www.gao.gov/assets/660/
655734.pdf. 655734.pdf.
2930 Section 8(a) of P.L. 113-89, 128 Stat. 1023. Section 8(a) of P.L. 113-89, 128 Stat. 1023.
3031 Section 6 of P.L. 113-89, 128 Stat.1028, as codified at 42 U.S.C. §4015(i). Section 6 of P.L. 113-89, 128 Stat.1028, as codified at 42 U.S.C. §4015(i).
3132 For properties which are excluded from, or ineligible for, the newly mapped subsidy, see FEMA, For properties which are excluded from, or ineligible for, the newly mapped subsidy, see FEMA, Flood Insurance
Manual, 3. How to Write, pp. 3-40 to 3-48, revised April 2021, at https://www.fema.gov/sites/default/files/documents/, pp. 3-40 to 3-48, revised April 2021, at https://www.fema.gov/sites/default/files/documents/
~~fema_fim-3-how-to-write_apr2021.pdf.~~
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properties is equal to the Preferred Risk Policy (PRP) properties is equal to the Preferred Risk Policy (PRP)3233 rate, but with a higher Federal Policy rate, but with a higher Federal Policy
Fee,Fee,3334 for the first 12 months following the map revision. After the first year, the newly mapped for the first 12 months following the map revision. After the first year, the newly mapped
rate begins to transition to a full-risk rate, with annual increases to newly mapped policy rate begins to transition to a full-risk rate, with annual increases to newly mapped policy
premiums calculated using a multiplier that varies by the year of the map change. As a result of premiums calculated using a multiplier that varies by the year of the map change. As a result of
the increases to the multiplier, premiums for newly-mapped policies are increasing 15% per the increases to the multiplier, premiums for newly-mapped policies are increasing 15% per
year.year.3435 As of September 2018, about 4% of NFIP policies receive a newly mapped subsidy. As of September 2018, about 4% of NFIP policies receive a newly mapped subsidy.3536
Grandfathering
FEMA allows owners of properties that were built in compliance with the FIRM which was in FEMA allows owners of properties that were built in compliance with the FIRM which was in
effect at the time of construction to maintain their old flood insurance rate class if their property effect at the time of construction to maintain their old flood insurance rate class if their property
is remapped into a new flood rate class. This practice is colloquially referred to as grandfathering, is remapped into a new flood rate class. This practice is colloquially referred to as grandfathering,
and is separate and distinct from the pre-FIRM subsidy.and is separate and distinct from the pre-FIRM subsidy.3637 A property can be grandfathered due to A property can be grandfathered due to
a change in its flood zone or a change in its BFE. a change in its flood zone or a change in its BFE.
Zone grandfathering is the most common form of grandfathering. An example of zone is the most common form of grandfathering. An example of zone
grandfathering would be a property that is initially mapped into flood zone A and is built to the grandfathering would be a property that is initially mapped into flood zone A and is built to the
proper building code and standards, and is later remapped to higher-risk flood zone V. If the proper building code and standards, and is later remapped to higher-risk flood zone V. If the
policyholder has maintained continuous insurance coverage under the NFIP, the owner of this policyholder has maintained continuous insurance coverage under the NFIP, the owner of this
property can pay the flood insurance premium based on the prior mapped zone (zone A). property can pay the flood insurance premium based on the prior mapped zone (zone A).
Elevation grandfathering occurs when a new FIRM increases the BFE, but the property itself occurs when a new FIRM increases the BFE, but the property itself
does not change flood zones. For example, a property that was initially mapped as being four feet does not change flood zones. For example, a property that was initially mapped as being four feet
above BFE but is now, under the revised FIRM, only one foot above BFE, would still be allowed above BFE but is now, under the revised FIRM, only one foot above BFE, would still be allowed
to pay the premium associated with a property four feet above BFE.to pay the premium associated with a property four feet above BFE.3738
FEMA does not consider the practice of grandfathering to be a subsidy for the NFIP, per se, FEMA does not consider the practice of grandfathering to be a subsidy for the NFIP, per se,
because grandfathered properties are within a class of policies that are not subsidized for the class because grandfathered properties are within a class of policies that are not subsidized for the class
as a whole; instead, the discount provided to an individual policyholder is cross-subsidized by as a whole; instead, the discount provided to an individual policyholder is cross-subsidized by
other policyholders in the NFIP. Thus, while grandfathering does intentionally allow other policyholders in the NFIP. Thus, while grandfathering does intentionally allow
policyholders to pay premiums that are less than their actuarial rate, the discount is offset by policyholders to pay premiums that are less than their actuarial rate, the discount is offset by
others in the same rate class as the grandfathered policyholder. As of September 2018, about 9% others in the same rate class as the grandfathered policyholder. As of September 2018, about 9%
of NFIP policies were grandfathered.of NFIP policies were grandfathered.3839

32fema_fim-3-how-to-write_apr2021.pdf. 33 A Preferred Risk Policy is a Standard Flood Insurance Policy that offers low-cost coverage to owners and tenants of A Preferred Risk Policy is a Standard Flood Insurance Policy that offers low-cost coverage to owners and tenants of
eligible buildings located in moderate- and low-risk flood zones in NFIP communities. See FEMA, eligible buildings located in moderate- and low-risk flood zones in NFIP communities. See FEMA, Flood Insurance
Manual, 3. How to Write, pp. 3-34 to 3-40, revised April 2021, at https://www.fema.gov/sites/default/files/documents/, pp. 3-34 to 3-40, revised April 2021, at https://www.fema.gov/sites/default/files/documents/
fema_fim-3-how-to-write_apr2021.pdf. fema_fim-3-how-to-write_apr2021.pdf.
3334 The Federal Policy Fee for a newly mapped property is $50, where the FPF for PRP is $25. See FEMA, The Federal Policy Fee for a newly mapped property is $50, where the FPF for PRP is $25. See FEMA, Flood
Insurance Manual, Rate Tables, revised April 2021, p. J-16, at https://www.fema.gov/sites/default/files/documents/, revised April 2021, p. J-16, at https://www.fema.gov/sites/default/files/documents/
fema_fim-appendix-j-rate-tables_apr2021.pdf. fema_fim-appendix-j-rate-tables_apr2021.pdf.
3435 FEMA, FEMA, April 1, 2021 and January 1, 2022 Program Changes, W-20020, p. 3, at https://nfipservices.floodsmart.gov/anges, W-20020, p. 3, at https://nfipservices.floodsmart.gov/
sites/default/files/w-20020.pdf. sites/default/files/w-20020.pdf.
3536 Email correspondence from FEMA Congressional Affairs staff, June 13, 2019. Email correspondence from FEMA Congressional Affairs staff, June 13, 2019.
3637 For a full description, see FEMA, For a full description, see FEMA, NFIP Grandfathering Rules for Agents, March 2015, at , March 2015, at
https://www.myfloridacfo.com/division/agents/industry/Laws-Rules/docs/NFIP_Grandfathering_Fact_Sheet.pdf. https://www.myfloridacfo.com/division/agents/industry/Laws-Rules/docs/NFIP_Grandfathering_Fact_Sheet.pdf.
3738 National Academies of Sciences, National Academies of Sciences, Affordability of National Flood Insurance Program Premiums: Part 1, 2015, p. 43, , 2015, p. 43,
at http://www.nap.edu/catalog/21709/affordability-of-national-flood-insurance-program-premiums-report-1. at http://www.nap.edu/catalog/21709/affordability-of-national-flood-insurance-program-premiums-report-1.
3839 Email correspondence from FEMA Congressional Affairs staff, June 13, 2019. Email correspondence from FEMA Congressional Affairs staff, June 13, 2019.
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Premium, Fees, and Surcharges
In addition to the building and contents premium, NFIP policyholders pay a number of fees and In addition to the building and contents premium, NFIP policyholders pay a number of fees and
surcharges: surcharges:
Paid by All Policyholders
 The  The Federal Policy Fee (FPF) was authorized by Congress in 1990 and helps was authorized by Congress in 1990 and helps
pay for the administrative expenses of the program, including floodplain pay for the administrative expenses of the program, including floodplain
mapping and some of the insurance operations.mapping and some of the insurance operations.3940 The amount of the Federal The amount of the Federal
Policy Fee is set by FEMA and can increase or decrease year to year. Since Policy Fee is set by FEMA and can increase or decrease year to year. Since
October 2017, the FPF has been $50 for Standard Flood Insurance Policies October 2017, the FPF has been $50 for Standard Flood Insurance Policies
(SFIPs), $25 for Preferred Risk Policies (PRPs), and $25 for contents-only (SFIPs), $25 for Preferred Risk Policies (PRPs), and $25 for contents-only
policies. policies.
 A  A reserve fund assessment was authorized by Congress in the Biggert-Waters was authorized by Congress in the Biggert-Waters
Flood Insurance Reform Act of 2012 (BW-12) Flood Insurance Reform Act of 2012 (BW-12)4041 to establish and maintain a to establish and maintain a
reserve fund to cover future claim and debt expenses, especially those from reserve fund to cover future claim and debt expenses, especially those from
catastrophic disasters.catastrophic disasters.4142 From April 2016, FEMA charged every NFIP policy a From April 2016, FEMA charged every NFIP policy a
reserve fund assessment equal to 15% of the premium. The reserve fund reserve fund assessment equal to 15% of the premium. The reserve fund
assessment was increased to 18% on April 1, 2020, for all policies.assessment was increased to 18% on April 1, 2020, for all policies.4243
 All NFIP policies are also assessed a surcharge following the passage of HFIAA.  All NFIP policies are also assessed a surcharge following the passage of HFIAA.
The amount of the The amount of the HFIAA surcharge is dependent on the type of property being is dependent on the type of property being
insured. For primary residences, the charge is $25; for all other properties, the insured. For primary residences, the charge is $25; for all other properties, the
charge is $250.charge is $250.4344
Paid by Most Policyholders
 The NFIP requires most policyholders to purchase  The NFIP requires most policyholders to purchase Increased Cost of
Compliance (ICC) coverage. This is in effect a separate insurance policy to . This is in effect a separate insurance policy to
offset the expense of complying with more rigorous building code standards offset the expense of complying with more rigorous building code standards
when local ordinances require them to do so. The ICC policy has a separate rate when local ordinances require them to do so. The ICC policy has a separate rate
premium structure, and provides an amount up to $30,000 in payments for certain premium structure, and provides an amount up to $30,000 in payments for certain
eligible expenses.eligible expenses.4445 Congress has capped the amount that can be paid for ICC Congress has capped the amount that can be paid for ICC
coverage at $75.coverage at $75.4546 ICC coverage is not required on condominium units and ICC coverage is not required on condominium units and
content-only policies. content-only policies.

3940 42 U.S.C. §4014(a)(1)(B)(iii). 42 U.S.C. §4014(a)(1)(B)(iii).
4041 Title II of P.L. 112-141. Title II of P.L. 112-141.
4142 Section 100212 of P.L. 112-141, 126 Stat. 992, as codified at 42 U.S.C. §4017a. Section 100212 of P.L. 112-141, 126 Stat. 992, as codified at 42 U.S.C. §4017a.
4243 FEMA, FEMA, Flood Insurance Manual, Rate Tables, revised April 2021, at https://www.fema.gov/sites/default/files/, revised April 2021, at https://www.fema.gov/sites/default/files/
documents/fema_fim-appendix-j-rate-tables_apr2021.pdf. documents/fema_fim-appendix-j-rate-tables_apr2021.pdf.
4344 For a description of how the surcharge is applied to different policy types, see FEMA, For a description of how the surcharge is applied to different policy types, see FEMA, The HFIAA Surcharge Fact
Sheet, April 2015, at https://dlnreng.hawaii.gov/nfip/wp-content/uploads/sites/11/2015/07/HFIAA-Surcharge-Fact-, April 2015, at https://dlnreng.hawaii.gov/nfip/wp-content/uploads/sites/11/2015/07/HFIAA-Surcharge-Fact-
Sheet_Final-April-2015.pdf. Sheet_Final-April-2015.pdf.
4445 For additional information on ICC coverage, see FEMA, For additional information on ICC coverage, see FEMA, Increased Cost of Compliance Coverage, at , at
https://www.fema.gov/floodplain-management/financial-help/increased-cost-compliance. https://www.fema.gov/floodplain-management/financial-help/increased-cost-compliance.
4546 42 U.S.C. §4011(b). 42 U.S.C. §4011(b).
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Paid by Some Policyholders
 In April 2019, FEMA began charging a  In April 2019, FEMA began charging a Severe Repetitive Loss (SRL)
premium4647 equivalent to 5% of the premium on all severe repetitive loss equivalent to 5% of the premium on all severe repetitive loss
properties. This premium was increased to 10% on April 1, 2020properties. This premium was increased to 10% on April 1, 2020, and and ~~will be~~
~~increased~~increased again to 15% on April 1, 2021. to 15% on April 1, 2021.4748
 If a community is on  If a community is on ~~probation48~~probation49 from the NFIP, all policyholders in that from the NFIP, all policyholders in that
community will be charged a community will be charged a probation surcharge of $50 for a full one-year of $50 for a full one-year
period, even if the community brings its program into compliance and is removed period, even if the community brings its program into compliance and is removed
from probation. from probation.
Proposed Rating Structure Under Risk Rating 2.0
How the NFIP Will Determine Flood Insurance Premiums
~~As proposed,~~ NFIP premiums calculated under Risk Rating 2.0 NFIP premiums calculated under Risk Rating 2.0 ~~will~~ reflect an individual reflect an individual
property’s flood risk, in contrast to the current rating system in which properties with the same property’s flood risk, in contrast to the current rating system in which properties with the same
NFIP flood risk are charged the same rates. This involves the use of a larger range of variables NFIP flood risk are charged the same rates. This involves the use of a larger range of variables
than in the current rating system, both in terms of modeling the flood risk and also in assessing than in the current rating system, both in terms of modeling the flood risk and also in assessing
the risk to each property. the risk to each property.
Risk Modeling
The current rating system includes only two sources of flood risk: the 1%-annual-chance fluvial The current rating system includes only two sources of flood risk: the 1%-annual-chance fluvial
flood and the 1%-annual-chance coastal flood.flood and the 1%-annual-chance coastal flood.4950 In contrast, Risk Rating 2.0 incorporates a In contrast, Risk Rating 2.0 incorporates a
broader range of flood frequencies and sources, including pluvial flooding (flooding due to heavy broader range of flood frequencies and sources, including pluvial flooding (flooding due to heavy
rainfall), flooding due to tsunami, Great Lakes flooding, coastal erosion outside the V zone, and rainfall), flooding due to tsunami, Great Lakes flooding, coastal erosion outside the V zone, and
flooding in leveed areas.flooding in leveed areas.5051 Risk Rating 2.0 uses a multi-model approach to support the Risk Rating 2.0 uses a multi-model approach to support the
development of the new rates, with data from multiple sources including existing NFIP map data, development of the new rates, with data from multiple sources including existing NFIP map data,

4647 Severe repetitive loss properties are those that have incurred four or more claim payments exceeding $5,000 each, Severe repetitive loss properties are those that have incurred four or more claim payments exceeding $5,000 each,
with a cumulative amount of such payments over $20,000; or at least two claims with a cumulative total exceeding the with a cumulative amount of such payments over $20,000; or at least two claims with a cumulative total exceeding the
value of the property. See 42 U.S.C. §4014(h) and 44 C.F.R. §79.2(h). value of the property. See 42 U.S.C. §4014(h) and 44 C.F.R. §79.2(h).
This premium is calculated as a percentage of the annual subtotal premium, which includes the building and contents This premium is calculated as a percentage of the annual subtotal premium, which includes the building and contents
premiums and the reserve fund assessment. See FEMA, premiums and the reserve fund assessment. See FEMA, April 1, 2021 and January 1, 2022 Program Changes, W-anges, W-
20020, p. 3, at https://nfipservices.floodsmart.gov/sites/default/files/w-20020.pdf. 20020, p. 3, at https://nfipservices.floodsmart.gov/sites/default/files/w-20020.pdf.
4748 FEMA, FEMA, April 1, 2021 and January 1, 2022 Program Changes, W-20020, p. 22, at anges, W-20020, p. 22, at
https://nfipservices.floodsmart.gov/sites/default/files/w-20020.pdf. https://nfipservices.floodsmart.gov/sites/default/files/w-20020.pdf.
4849 A community can be placed on probation by FEMA if it is found that it is failing to adequately enforce the floodplain A community can be placed on probation by FEMA if it is found that it is failing to adequately enforce the floodplain
management standards it has adopted. As established by regulations, probation can result in a fee of $50 being charged management standards it has adopted. As established by regulations, probation can result in a fee of $50 being charged
to all policyholders in the community while the community is given time to rectify FEMA’s concerns regarding their to all policyholders in the community while the community is given time to rectify FEMA’s concerns regarding their
implementation of the floodplain management standards. Ultimately, if the community does not correct its cited implementation of the floodplain management standards. Ultimately, if the community does not correct its cited
deficiencies after given time periods described in regulations, the community will be suspended from the NFIP by deficiencies after given time periods described in regulations, the community will be suspended from the NFIP by
FEMA. For additional details on probation, see 44 C.F.R. §59.24(b) and (c), and FEMA, FEMA. For additional details on probation, see 44 C.F.R. §59.24(b) and (c), and FEMA, Probation, at , at
https://www.fema.gov/glossary/probation. https://www.fema.gov/glossary/probation.
4950 FEMA defines the 1%-annual-chance flood as a flood that has a 1% chance of being equaled or exceeded in any FEMA defines the 1%-annual-chance flood as a flood that has a 1% chance of being equaled or exceeded in any
given year. See FEMA, given year. See FEMA, Flood Zones, at https://www.fema.gov/glossary/flood-zones. , at https://www.fema.gov/glossary/flood-zones.
5051 FEMA, FEMA, National Flood Insurance Program: Risk Rating 2.0 Methodology and Data Sources, pp. 4-10, April 16, s, pp. 4-10, April 16,
2021, at https://www.fema.gov/sites/default/files/documents/fema_risk-rating-2.0-methodology-data-sources_4-21.pdf 2021, at https://www.fema.gov/sites/default/files/documents/fema_risk-rating-2.0-methodology-data-sources_4-21.pdf
(hereinafter (hereinafter Risk Rating 2.0 Methodology). ).
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NFIP policy and claims data, United States Geological Survey (USGS) 3-D elevation data, NFIP policy and claims data, United States Geological Survey (USGS) 3-D elevation data,5152
National Oceanographic and Atmospheric Administration (NOAA) National Oceanographic and Atmospheric Administration (NOAA) ~~SLOSH52~~SLOSH53 storm surge data, storm surge data,
and U.S. Army Corps of Engineers data sets, particularly for areas behind levees. and U.S. Army Corps of Engineers data sets, particularly for areas behind levees.
According to FEMA, Risk Rating 2.0 uses three commercial catastrophe models to estimate According to FEMA, Risk Rating 2.0 uses three commercial catastrophe models to estimate
future loss potential.future loss potential.5354 The use of catastrophe models to estimate potential losses caused by events The use of catastrophe models to estimate potential losses caused by events
such as hurricane wind, storm surge, inland flooding, tornadoes, earthquakes, and wildfires has such as hurricane wind, storm surge, inland flooding, tornadoes, earthquakes, and wildfires has
become a standard risk management practice in the insurance industry.become a standard risk management practice in the insurance industry.5455 Catastrophe models were Catastrophe models were
initially developed to address the shortcomings inherent in using historical data to project initially developed to address the shortcomings inherent in using historical data to project
potential losses from infrequent, severe events that impacted many properties that were not potential losses from infrequent, severe events that impacted many properties that were not
geographically diverse.geographically diverse.5556 While each peril model reflects factors specific to the peril being While each peril model reflects factors specific to the peril being
modeled, catastrophe models generally have similar components, including modules simulating modeled, catastrophe models generally have similar components, including modules simulating
(1) the probability of the particular catastrophe occurring; (2) the intensity of the catastrophe; (3) (1) the probability of the particular catastrophe occurring; (2) the intensity of the catastrophe; (3)
the damage to structures; and (4) the allocation of the amount of the loss among those responsible the damage to structures; and (4) the allocation of the amount of the loss among those responsible
for payment. for payment.
The first stage of catastrophe modeling is to generate a stochastic event set, which is a database of The first stage of catastrophe modeling is to generate a stochastic event set, which is a database of
simulated events. Each event is characterized by a probability of occurrence (event rate) and simulated events. Each event is characterized by a probability of occurrence (event rate) and
geographic area affected. Thousands of possible event scenarios are simulated, based on realistic geographic area affected. Thousands of possible event scenarios are simulated, based on realistic
parameters and historical data, to model probabilistically what could happen in the future. The parameters and historical data, to model probabilistically what could happen in the future. The
hazard component of catastrophe models quantifies the severity of each event in a geographical hazard component of catastrophe models quantifies the severity of each event in a geographical
area, once the event has occurred. An event footprint is generated, which is a spatial area, once the event has occurred. An event footprint is generated, which is a spatial
representation of hazard intensity from a specific event. For example, a model could calculate the representation of hazard intensity from a specific event. For example, a model could calculate the
peak wind speeds at each location affected by hurricane winds. Property vulnerability is modeled peak wind speeds at each location affected by hurricane winds. Property vulnerability is modeled
using mean damage ratios (MDRs), which are losses expressed as a percent of value, for a given using mean damage ratios (MDRs), which are losses expressed as a percent of value, for a given
hazard level (e.g., hurricane wind speed) and location. MDRs give the average percentages of hazard level (e.g., hurricane wind speed) and location. MDRs give the average percentages of
damage that are expected for a structure with the characteristics input into the model. Finally, a damage that are expected for a structure with the characteristics input into the model. Finally, a
financial or insurance module quantifies the financial consequences of each event from various financial or insurance module quantifies the financial consequences of each event from various
financial perspectives. The policy terms such as deductibles, limits, and reinsurance are applied to financial perspectives. The policy terms such as deductibles, limits, and reinsurance are applied to
the damage from each insured property from the vulnerability model to calculate the allocation of the damage from each insured property from the vulnerability model to calculate the allocation of
the loss amount.the loss amount.5657
In the first stage of Risk Rating 2.0 modeling, FEMA conducted probabilistic flood risk analyses, In the first stage of Risk Rating 2.0 modeling, FEMA conducted probabilistic flood risk analyses,
in which structures are assigned specific annualized probabilities of being impacted by flood, and in which structures are assigned specific annualized probabilities of being impacted by flood, and
to validate these results with NFIP historical data. The next step compared the results of this to validate these results with NFIP historical data. The next step compared the results of this
analysis with the output of commercial catastrophe models. Finally, FEMA generated average analysis with the output of commercial catastrophe models. Finally, FEMA generated average

5152 See United States Geological Survey, See United States Geological Survey, 3D Elevation Program, at https://www.usgs.gov/core-science-systems/ngp/, at https://www.usgs.gov/core-science-systems/ngp/
3dep. 3dep.
5253 The National Oceanographic and Atmospheric Administration’s Sea, Lake, and Overhead Surges from Hurricane The National Oceanographic and Atmospheric Administration’s Sea, Lake, and Overhead Surges from Hurricane
(SLOSH) model is a numerical model developed by the National Weather Service to estimate storm surge heights (SLOSH) model is a numerical model developed by the National Weather Service to estimate storm surge heights
resulting from historical, hypothetical, or predicted hurricanes. See National Hurricane Center, resulting from historical, hypothetical, or predicted hurricanes. See National Hurricane Center, Sea, Lake, and
Overhead Surges from Hurricane (SLOSH), at https://www.nhc.noaa.gov/surge/slosh.php. , at https://www.nhc.noaa.gov/surge/slosh.php.
5354 Risk Rating 2.0 Methodology, pp. 8-10. , pp. 8-10.
5455 American Academy of Actuaries, American Academy of Actuaries, Uses of Catastrophe Model Output, Washington, DC, July 2018, p. 3, at , Washington, DC, July 2018, p. 3, at
https://www.actuary.org/sites/default/files/files/publications/Catastrophe_Modeling_Monograph_07.25.2018.pdf. https://www.actuary.org/sites/default/files/files/publications/Catastrophe_Modeling_Monograph_07.25.2018.pdf.
5556 Ibid. Ibid.
5657 Ibid., pp. 9-10. Ibid., pp. 9-10.
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annual loss values for certain geographies, focusing particularly on leveed areas, including levee annual loss values for certain geographies, focusing particularly on leveed areas, including levee
quality,quality,5758 and complex flooding hazards. and complex flooding hazards.
Geographic and Structural Variables
Geographical variables used in Risk Rating 2.0 include the distance to water and the type of water Geographical variables used in Risk Rating 2.0 include the distance to water and the type of water
(e.g., river, lake, or coast), the drainage area of the river, whether or not the structure is on a (e.g., river, lake, or coast), the drainage area of the river, whether or not the structure is on a
barrier island or behind a levee, and the elevation of the structure relative to the flooding source. barrier island or behind a levee, and the elevation of the structure relative to the flooding source.
The structural variables used by FEMA in Risk Rating 2.0 include the foundation type of the The structural variables used by FEMA in Risk Rating 2.0 include the foundation type of the
structure, the height of the lowest floor of the structure relative to BFE, and the replacement cost structure, the height of the lowest floor of the structure relative to BFE, and the replacement cost
value of the structure.value of the structure.5859
Replacement Cost Value
In the current NFIP rating system, rates are based on the amount of insurance purchased for a In the current NFIP rating system, rates are based on the amount of insurance purchased for a
~~structure59~~structure60 rather than the replacement cost of that structure. For most actuarially-rated structures, rather than the replacement cost of that structure. For most actuarially-rated structures,
the NFIP classifies the first $60,000 of building coverage for single-family residences ($175,000 the NFIP classifies the first $60,000 of building coverage for single-family residences ($175,000
for businesses) and $25,000 of contents coverage as the basic limit. It charges higher rates for for businesses) and $25,000 of contents coverage as the basic limit. It charges higher rates for
coverage below this amount, because losses are more likely to occur in this range. Rates for coverage below this amount, because losses are more likely to occur in this range. Rates for
additional coverage above the basic limit are lower. The basic and additional rates are weighted to additional coverage above the basic limit are lower. The basic and additional rates are weighted to
account for the average tendency to buy less insurance than the replacement value. For example, account for the average tendency to buy less insurance than the replacement value. For example,
a post-FIRM single-family property in Zone AE,a post-FIRM single-family property in Zone AE,6061 with the elevation of the lowest floor at the with the elevation of the lowest floor at the
BFE and no basement, would currently pay a basic rate of 2.21% per $100 coverage on the first BFE and no basement, would currently pay a basic rate of 2.21% per $100 coverage on the first
$60,000 and an additional rate of 0.26% per $100 of coverage over $60,000.$60,000 and an additional rate of 0.26% per $100 of coverage over $60,000.6162
The two-tiered rating structure was used by the NFIP for two reasons. First, it ensured that the The two-tiered rating structure was used by the NFIP for two reasons. First, it ensured that the
premium collected is sufficient to cover the typical claim, even if a policy is under-insured; premium collected is sufficient to cover the typical claim, even if a policy is under-insured;
according to FEMA, most NFIP claims are below $60,000.according to FEMA, most NFIP claims are below $60,000.6263 By charging a high rate for coverage By charging a high rate for coverage
up to $60,000, a policyholder’s premium is likely to be sufficient to cover a typical claim. up to $60,000, a policyholder’s premium is likely to be sufficient to cover a typical claim.
Secondly, it encouraged policyholders to insure their structure fully. By charging a low additional Secondly, it encouraged policyholders to insure their structure fully. By charging a low additional
rate, policyholders are encouraged not just to insure a typical claim, but to insure against the rate, policyholders are encouraged not just to insure a typical claim, but to insure against the
unlikely but possible higher claim. unlikely but possible higher claim.
For much of the NFIP’s existence, the two-tiered rating structure operated with minimal inequity. For much of the NFIP’s existence, the two-tiered rating structure operated with minimal inequity.
However, as the range of replacement values widened, particularly through the 2000s, the However, as the range of replacement values widened, particularly through the 2000s, the
potential for inequity caused by rating based on coverage instead of structure value grew. Two potential for inequity caused by rating based on coverage instead of structure value grew. Two
groups are most subject to inequity. First, structures whose value is closer to the $60,000 basic groups are most subject to inequity. First, structures whose value is closer to the $60,000 basic
limit pay more than they would if their rate was based on their structure value because their entire limit pay more than they would if their rate was based on their structure value because their entire

5758 Risk Rating 2.0 Methodology, p. 16. , p. 16.
5859 Risk Rating 2.0 Methodology, pp. 11-14. , pp. 11-14.
5960 The maximum coverage offered by the NFIP for single-family dwellings (which also includes single-family The maximum coverage offered by the NFIP for single-family dwellings (which also includes single-family
residential units within a 2-4 family building) is $100,000 for contents and $250,000 for buildings coverage. The residential units within a 2-4 family building) is $100,000 for contents and $250,000 for buildings coverage. The
maximum available coverage limit for other residential buildings is $500,000 for building coverage and $100,000 for maximum available coverage limit for other residential buildings is $500,000 for building coverage and $100,000 for
contents coverage, and the maximum coverage limit for contents coverage, and the maximum coverage limit for ~~non-residential~~nonresidential business buildings is $500,000 for building business buildings is $500,000 for building
coverage and $500,000 for contents coverage. coverage and $500,000 for contents coverage.
6061 Flood zone AE is the area subject to inundation by the 1% annual-chance-flood when information about the BFE is Flood zone AE is the area subject to inundation by the 1% annual-chance-flood when information about the BFE is
available. See FEMA, Zone available. See FEMA, Zone AE and A1-30, at https://www.fema.gov/glossary/zone-ae-and-a1-30. , at https://www.fema.gov/glossary/zone-ae-and-a1-30.
6162 FEMA, FEMA, Flood Insurance Manual, Rate Tables, Revised April 2021, p. J-7, at https://www.fema.gov/sites/default/, Revised April 2021, p. J-7, at https://www.fema.gov/sites/default/
files/documents/fema_fim-appendix-j-rate-tables_apr2021.pdf. files/documents/fema_fim-appendix-j-rate-tables_apr2021.pdf.
6263 Email correspondence from FEMA Congressional Affairs staff, July 19, 2017. Email correspondence from FEMA Congressional Affairs staff, July 19, 2017.
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rate is mainly comprised of the higher basic rate. Second, structures whose value is above rate is mainly comprised of the higher basic rate. Second, structures whose value is above
$250,000 pay less than they would if their rate was based on structure value, because their rate is $250,000 pay less than they would if their rate was based on structure value, because their rate is
based on an average structure value that is much less than their actual structure value. In addition, based on an average structure value that is much less than their actual structure value. In addition,
high-valued structures can produce much higher claims than lower valued structures with the high-valued structures can produce much higher claims than lower valued structures with the
same intensity of damage.same intensity of damage.6364
When replacement cost value is used in setting NFIP premium rates, it is anticipated that those When replacement cost value is used in setting NFIP premium rates, it is anticipated that those
structures with higher replacement costs than current local or national averages would begin structures with higher replacement costs than current local or national averages would begin
paying more for their NFIP coverage than those structures that are below the average, which paying more for their NFIP coverage than those structures that are below the average, which
would pay less. would pay less. ~~How much more, or how much less, has not been made available by FEMA.~~
According to FEMA, the replacement cost value of a single-family structure is based on zip code, square footage, the number of stories, and the year it was built.65 Mitigation Credits in Risk Rating 2.0
According to FEMA, Risk Rating 2.0 would initially provide credits for three mitigation actions: According to FEMA, Risk Rating 2.0 would initially provide credits for three mitigation actions:
1. installing flood openings according to the criteria in 44 C.F.R. §60.3; 1. installing flood openings according to the criteria in 44 C.F.R. §60.3;6466
2. elevating onto posts, piles, and piers; and 2. elevating onto posts, piles, and piers; and
3. elevating machinery and equipment above the lowest floor. 3. elevating machinery and equipment above the lowest floor.65
~~However, information on credits for mitigation actions is not included on any of the materials on~~
~~the updated Risk Rating 2.0 website.~~ 67 Currently the only mitigation activities for which the NFIP Currently the only mitigation activities for which the NFIP
gives premium credit are elevating a structure and flood-proofing under certain circumstances.gives premium credit are elevating a structure and flood-proofing under certain circumstances.66
68 Risk Rating 2.0 could encourage individual policyholders to do more to mitigate the flood risk for Risk Rating 2.0 could encourage individual policyholders to do more to mitigate the flood risk for
their property by introducing credit for a wider range of mitigation activities. their property by introducing credit for a wider range of mitigation activities.
Risk Rating 2.0 and Flood Zones
Flood zones will not be used in calculating a property’s flood insurance premium following the Flood zones will not be used in calculating a property’s flood insurance premium following the
introduction of Risk Rating 2.0; instead, the premium is calculated based on the specific features introduction of Risk Rating 2.0; instead, the premium is calculated based on the specific features
of an individual property. However, flood zones will still be needed for floodplain management of an individual property. However, flood zones will still be needed for floodplain management
purposes; for example, all new construction and substantial improvements to buildings in Zone V purposes; for example, all new construction and substantial improvements to buildings in Zone V
must be elevated on pilings, posts, piers, or columns.must be elevated on pilings, posts, piers, or columns.6769 The boundary of the SFHA will still be The boundary of the SFHA will still be
required for the mandatory purchase requirement. The FIRM map required for the mandatory purchase requirement. The FIRM map ~~appeal68~~appeal70 process will still exist, process will still exist,
but once Risk Rating 2.0 begins, map appeals are not to have any effect on the premium that a but once Risk Rating 2.0 begins, map appeals are not to have any effect on the premium that a
policyholder pays. policyholder pays.
Although FEMA has not yet given Although FEMA has not yet given ~~any~~specific details of how grandfathered properties will be affected by details of how grandfathered properties will be affected by
Risk Rating 2.0, other than to say that “all properties will be on a glide path to Risk Rating 2.0, other than to say that “all properties will be on a glide path to ~~actuarial rates,”69~~
~~the implication of the fact that flood zones will no longer be used to set premiums appears to~~
~~indicate that zone grandfathering, at least, will no longer be relevant.~~

~~63 Ibid.~~
64 64 Ibid. 65 Email from FEMA Congressional Affairs staff, October 1, 2021. 66 44 C.F.R. Part 60, 44 C.F.R. Part 60, Criteria for Land Management and Use, at https://www.govinfo.gov/content/pkg/CFR-2012-, at https://www.govinfo.gov/content/pkg/CFR-2012-
title44-vol1/pdf/CFR-2012-title44-vol1-sec60-3.pdf. title44-vol1/pdf/CFR-2012-title44-vol1-sec60-3.pdf.
6567 CRS briefing from FEMA staff, May 8, 2019. CRS briefing from FEMA staff, May 8, 2019.
6668 See FEMA, See FEMA, Flood Insurance Manual, 3. How to Write, pp. 3-67 to 3-70, revised April 2021, at , pp. 3-67 to 3-70, revised April 2021, at
https://www.fema.gov/sites/default/files/documents/fema_fim-3-how-to-write_apr2021.pdf. https://www.fema.gov/sites/default/files/documents/fema_fim-3-how-to-write_apr2021.pdf.
6769 44 C.F.R. §60.3(e)(4). 44 C.F.R. §60.3(e)(4).
6870 See FEMA, See FEMA, Appeals and Protests, at https://www.fema.gov/sites/default/files/2020-05/, at https://www.fema.gov/sites/default/files/2020-05/
FactSheet_FIMA_Appeals_RID_SC_101415.pdf. FactSheet_FIMA_Appeals_RID_SC_101415.pdf.
~~69 CRS briefing from FEMA staff, May 8, 2019.~~
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actuarial rates,”71 the implication of the fact that flood zones will no longer be used to set premiums appears to indicate that zone grandfathering, at least, will no longer be relevant. Maximum Premium Increases Under Current
Statute
FEMA has statutory authority to set premium rates.FEMA has statutory authority to set premium rates.7072 The limitations on annual premium The limitations on annual premium
increases are also set in statute,increases are also set in statute,7173 and Risk Rating 2.0 will not be able to increase rates annually and Risk Rating 2.0 will not be able to increase rates annually
beyond these caps. HFIAA set allowable rate increases for primary residences at 5-18% per year. beyond these caps. HFIAA set allowable rate increases for primary residences at 5-18% per year.
The changes introduced in HFIAA permit individual property increases of up to 18%, but limits The changes introduced in HFIAA permit individual property increases of up to 18%, but limits
the rate the rate ~~class72~~class74 increases to 15% per year. increases to 15% per year.7375 In other words, the In other words, the average annual premium rate annual premium rate
increase for primary residences within a single risk classification rate may not be increased by increase for primary residences within a single risk classification rate may not be increased by
more than 15% a year, while the more than 15% a year, while the individual premium rate increase for any individual policy may premium rate increase for any individual policy may
not be increased by more than 18% each year.not be increased by more than 18% each year.7476 Other categories of properties are required to Other categories of properties are required to
have their premium increased by 25% per year until they reach full risk-based rates: this includes have their premium increased by 25% per year until they reach full risk-based rates: this includes
(1) non-primary residences; (2) non-residential properties; (3) business properties; (4) properties (1) non-primary residences; (2) non-residential properties; (3) business properties; (4) properties
with severe repetitive loss;with severe repetitive loss;7577 (5) properties with substantial cumulative damage; (5) properties with substantial cumulative damage;7678 and properties and properties
with substantial with substantial ~~damage77~~damage79 or substantial improvement after July 6, 2012. or substantial improvement after July 6, 2012.
It is notable, however, that FEMA does not consider everything that policyholders pay to the It is notable, however, that FEMA does not consider everything that policyholders pay to the
NFIP to be part of the premium and therefore subject to these caps. When premium rates are NFIP to be part of the premium and therefore subject to these caps. When premium rates are
calculated for compliance with the statutory caps, FEMA only includes the building and contents calculated for compliance with the statutory caps, FEMA only includes the building and contents
coverage, the Increased Cost of Compliance coverage, the reserve fund assessment, and the SRL coverage, the Increased Cost of Compliance coverage, the reserve fund assessment, and the SRL
premium if applicable.premium if applicable.7880 Other fees and surcharges are not considered part of the premium and Other fees and surcharges are not considered part of the premium and
~~therefore are not subject to the premium cap limitations, including the Federal Policy Fee, the~~
~~HFIAA surcharge and, if relevant, the probation surcharge.79~~

~~70 42 U.S.C. §4015(a).~~
~~71 42 U.S.C. §4015(e).~~
72 71 CRS briefing from FEMA staff, May 8, 2019. 72 42 U.S.C. §4015(a). 73 42 U.S.C. §4015(e). 74 A single rate class (or risk classification) is a group of properties with the same flood risk classification; for example, A single rate class (or risk classification) is a group of properties with the same flood risk classification; for example,
pre-FIRM properties or properties with the newly mapped subsidy. pre-FIRM properties or properties with the newly mapped subsidy.
7375 The chargeable risk premium rate for any property may not be increased by more than 18% per year (except in The chargeable risk premium rate for any property may not be increased by more than 18% per year (except in
certain circumstances, which are listed); see 42 U.S.C. §4015(e)(1). The chargeable risk premium may not be increased certain circumstances, which are listed); see 42 U.S.C. §4015(e)(1). The chargeable risk premium may not be increased
by an amount that would result in the average of such rate increases for properties within the risk classification by an amount that would result in the average of such rate increases for properties within the risk classification
exceeding 15% of the average of the risk premium rate for properties within the risk classification; see 42 U.S.C. exceeding 15% of the average of the risk premium rate for properties within the risk classification; see 42 U.S.C.
§4015(e)(3). §4015(e)(3).
7476 For example, the average annual premium increase for pre-FIRM primary residences cannot be more than 15%, but For example, the average annual premium increase for pre-FIRM primary residences cannot be more than 15%, but
an individual pre-FIRM primary residence could have an increase of up to 18% due to particular characteristics of the an individual pre-FIRM primary residence could have an increase of up to 18% due to particular characteristics of the
structure. structure.
7577 Severe repetitive loss properties are those that have incurred four or more claim payments exceeding $5,000 each, Severe repetitive loss properties are those that have incurred four or more claim payments exceeding $5,000 each,
with a cumulative amount of such payments over $20,000; or at least two claims with a cumulative total exceeding the with a cumulative amount of such payments over $20,000; or at least two claims with a cumulative total exceeding the
value of the property. See 42 U.S.C. §4014(h) and 44 C.F.R. §79.2(h). value of the property. See 42 U.S.C. §4014(h) and 44 C.F.R. §79.2(h).
7678 A property with substantial cumulative damage is any property that has incurred flood-related damage in which the A property with substantial cumulative damage is any property that has incurred flood-related damage in which the
cumulative amounts of payments under the NFIP equaled or exceeded the fair market value of such property. See 42 cumulative amounts of payments under the NFIP equaled or exceeded the fair market value of such property. See 42
U.S.C. §4014(a)(2)(C). U.S.C. §4014(a)(2)(C).
7779 44 C.F.R §59.1 defines “substantial damage” as damage of any origin sustained by a structure whereby the cost of 44 C.F.R §59.1 defines “substantial damage” as damage of any origin sustained by a structure whereby the cost of
restoring the structure to its before-damaged condition would equal or exceed 50% of the market value of the structure restoring the structure to its before-damaged condition would equal or exceed 50% of the market value of the structure
before the damage occurred. For additional discussion of substantial damage, see FEMA Fact Sheet, before the damage occurred. For additional discussion of substantial damage, see FEMA Fact Sheet, NFIP “Substantial
Damage”—What Does It Mean? at https://www.fema.gov/ at https://www.fema.gov/~~news~~press-release/-release/~~20200220~~20210318/fact-sheet-nfip-substantial-damage-/fact-sheet-nfip-substantial-damage-
what-does-it-mean-0. what-does-it-mean-0.
7880 Email from FEMA Congressional Affairs staff, January 19, 2020. Email from FEMA Congressional Affairs staff, January 19, 2020.
~~79 FEMA, April 1, 2021 and January 1, 2022 Program Changes, W-20020, pp. 1-2, at~~
~~https://nfipservices.floodsmart.gov/sites/default/files/w-20020.pdf.~~
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therefore are not subject to the premium cap limitations, including the Federal Policy Fee, the HFIAA surcharge and, if relevant, the probation surcharge.81 Table 1 shows the effects of a maximum statutory increase on the national average premium for a shows the effects of a maximum statutory increase on the national average premium for a
Standard Flood Insurance Policy (SFIP) subject to an 18% increase and a 25% increase, Standard Flood Insurance Policy (SFIP) subject to an 18% increase and a 25% increase,
respectively. This figure includes the amounts charged to provide building coverage, contents respectively. This figure includes the amounts charged to provide building coverage, contents
coverage, Increased Cost of Compliance (ICC) coverage, and SRL premium if applicable. It also coverage, Increased Cost of Compliance (ICC) coverage, and SRL premium if applicable. It also
reflects any optional deductibles the policy selected, Community Rating System discounts where reflects any optional deductibles the policy selected, Community Rating System discounts where
applicable, and the severe repetitive loss premium where applicable.applicable, and the severe repetitive loss premium where applicable.8082 According to FEMA, the According to FEMA, the
national average for policies subject to 25% rate increases is $5,878.15 and the national average national average for policies subject to 25% rate increases is $5,878.15 and the national average
for all other policies (i.e., not subject to the 25% rate increase requirement) is $730.34. The for all other policies (i.e., not subject to the 25% rate increase requirement) is $730.34. The
national average premium for all NFIP policies is $818.70.national average premium for all NFIP policies is $818.70.8183
For an SFIP primary residence, the maximum 18% increase would be calculated on the premium For an SFIP primary residence, the maximum 18% increase would be calculated on the premium
of $730.34, leading to an increase of $131.46 and a new premium of $861.80. However, an SFIP of $730.34, leading to an increase of $131.46 and a new premium of $861.80. However, an SFIP
primary residence would also pay an FPF of $50 and a HFIAA surcharge of $25, so the total primary residence would also pay an FPF of $50 and a HFIAA surcharge of $25, so the total
amount due to the NFIP after an 18% increase would be $936.80. amount due to the NFIP after an 18% increase would be $936.80.
An SFIP for a property subject to a 25% increase on the initial premium of $5,878.158, would An SFIP for a property subject to a 25% increase on the initial premium of $5,878.158, would
lead to an increase of $1469.54 and a new premium of $7,347.69. Costs for such a policy for a lead to an increase of $1469.54 and a new premium of $7,347.69. Costs for such a policy for a
non-primary residence would also include an FPF of $50 and a HFIAA surcharge of $250, so the non-primary residence would also include an FPF of $50 and a HFIAA surcharge of $250, so the
total amount due to the NFIP after a 25% increase would be $7,647.69. total amount due to the NFIP after a 25% increase would be $7,647.69.
Table 1. Maximum Increases on an Average NFIP Premium
Based on a Standard Flood Insurance Premium Based on a Standard Flood Insurance Premium
Primary
~~Policies Subject~~
Residences
~~to 25%~~Policies Subject
(Subject to 18%
~~Increases~~to 25%
Premium, Fee, or Surcharge
Increase)
Increases Premium Subject to Statutory Cap
$730.34
$5,878.15
Federal Policy Fee (FPF) for SFIP Federal Policy Fee (FPF) for SFIP
$50 $50
$50 $50
HFIAA Surcharge HFIAA Surcharge
$25 $25
$250 $250
Total Due to NFIP before Increase
$805.34
$6,178.15
18% Increase on Premium of $730.34 18% Increase on Premium of $730.34
$131.46 $131.46

Total Premium after 18% Increase Total Premium after 18% Increase
$861.80 $861.80

Total Due to NFIP after 18% Increase (includes FPF, HFIAA)
$936.80

25% Increase on Premium of $5,878.15 25% Increase on Premium of $5,878.15

$1,469.54 $1,469.54
Total Premium after 25% Increase Total Premium after 25% Increase

$7,347.69 $7,347.69
Total Due to NFIP after 25% Increase (includes FPF, HFIAA)

$7,647.69
Source: Calculated by Congressional Research Service. National average NFIP premium provided by FEMA
~~Congressional Affairs staff, January 19, 2021.~~

80 81 FEMA, April 1, 2021 and January 1, 2022 Program Changes, W-20020, pp. 1-2, at https://nfipservices.floodsmart.gov/sites/default/files/w-20020.pdf. 82 Ibid. Please note that according to FEMA guidelines, when premium rates are calculated for compliance with the Ibid. Please note that according to FEMA guidelines, when premium rates are calculated for compliance with the
statutory caps, FEMA only includes the building and contents coverage, the Increased Cost of Compliance coverage, statutory caps, FEMA only includes the building and contents coverage, the Increased Cost of Compliance coverage,
and the reserve fund assessment. The Federal Policy Fee, the HFIAA surcharge, and the probation surcharge, if and the reserve fund assessment. The Federal Policy Fee, the HFIAA surcharge, and the probation surcharge, if
applicable, are not considered premium and are therefore not subject to the premium rate cap limitations. applicable, are not considered premium and are therefore not subject to the premium rate cap limitations.
8183 Email from FEMA Congressional Affairs staff, January 19, 2021. Email from FEMA Congressional Affairs staff, January 19, 2021.
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Source: Calculated by the Congressional Research Service. National average NFIP premium provided by FEMA Congressional Affairs staff, January 19, 2021. Risk Rating 2.0 and NFIP Cross-Subsidies
The current three categories of properties which pay less than the full risk-based rate (pre-FIRM, The current three categories of properties which pay less than the full risk-based rate (pre-FIRM,
newly-mapped, and grandfathered) are determined by the date when the structure was built newly-mapped, and grandfathered) are determined by the date when the structure was built
relative to the date of adoption of the FIRM, rather than the flood risk or the ability of the relative to the date of adoption of the FIRM, rather than the flood risk or the ability of the
policyholder to pay. As proposed, the new rating system will not eliminate the three categories, policyholder to pay. As proposed, the new rating system will not eliminate the three categories,
nor the process of phasing out subsidies which began with BW-12, but rate changes will not nor the process of phasing out subsidies which began with BW-12, but rate changes will not
necessarily be uniform within each category. Premiums for individual properties will be tied to necessarily be uniform within each category. Premiums for individual properties will be tied to
their actual flood risk rather than the flood zone, but the maximum rate at which the subsidies will their actual flood risk rather than the flood zone, but the maximum rate at which the subsidies will
be phased out will continue to be constrained by law. be phased out will continue to be constrained by law.
In general, Risk Rating 2.0 is expected to lead to the reduction of cross-subsidies between NFIP In general, Risk Rating 2.0 is expected to lead to the reduction of cross-subsidies between NFIP
policyholders, and the eventual elimination of premium subsidies and cross-subsidies once all policyholders, and the eventual elimination of premium subsidies and cross-subsidies once all
properties are paying the full risk-based rate. However, certain non-insurance activities of the properties are paying the full risk-based rate. However, certain non-insurance activities of the
NFIP are funded by cross-subsidies from NFIP policyholders’ premiums. For example, through a NFIP are funded by cross-subsidies from NFIP policyholders’ premiums. For example, through a
program called the Community Rating System (CRS), FEMA encourages communities to program called the Community Rating System (CRS), FEMA encourages communities to
improve upon the minimum floodplain management standards that are required to participate in improve upon the minimum floodplain management standards that are required to participate in
the NFIP.the NFIP.8284 Policyholders in communities which participate in the CRS can get discounts of 5% to Policyholders in communities which participate in the CRS can get discounts of 5% to
45% on their flood insurance premiums. These discounts are determined by the activities carried 45% on their flood insurance premiums. These discounts are determined by the activities carried
out by the community to reduce flood and erosion risk and adopt measures to protect natural and out by the community to reduce flood and erosion risk and adopt measures to protect natural and
beneficial floodplain functions.beneficial floodplain functions.8385 The CRS discount is cross-subsidized into the NFIP program, The CRS discount is cross-subsidized into the NFIP program,
such that the discount for one community ends up being offset by increased premium rates in such that the discount for one community ends up being offset by increased premium rates in
other communities across the NFIP. As of the 2019 NFIP actuarial rate review, an average 13.3% other communities across the NFIP. As of the 2019 NFIP actuarial rate review, an average 13.3%
discount for CRS communities is cross-subsidized and shared across the remaining NFIP discount for CRS communities is cross-subsidized and shared across the remaining NFIP
communities through a cost (or load) increase of 15.3%.communities through a cost (or load) increase of 15.3%.~~84 It is not yet clear how Risk Rating 2.0~~
~~will affect the CRS cross-subsidy. However,~~86 FEMA has confirmed that discounts to policyholders FEMA has confirmed that discounts to policyholders
in communities that participate in the CRS will continue, with this discount uniformly applied to in communities that participate in the CRS will continue, with this discount uniformly applied to
all policies in the community regardless of whether the structure is inside or outside the SFHA.all policies in the community regardless of whether the structure is inside or outside the SFHA.85
87 In addition, approximately 36.4% of the funding for flood mapping and floodplain management is In addition, approximately 36.4% of the funding for flood mapping and floodplain management is
collected from NFIP policyholders in the form of the FPF.collected from NFIP policyholders in the form of the FPF.8688 About 72% of the resources from the About 72% of the resources from the
FPF are allocated to flood mapping, with floodplain management receiving about 18% of the FPF are allocated to flood mapping, with floodplain management receiving about 18% of the
overall income from the FPF.overall income from the FPF.8789
Initial Information on Impact of Risk Rating 2.0
FEMA has released some details of the projected impact of Risk Rating 2.0 on premiumsFEMA has released some details of the projected impact of Risk Rating 2.0 on premiums.
~~According to these projections, at the national level, 23% of policyholders would see immediate~~
~~decreases in their premiums.88 FEMA has released figures~~ nationally and for percentage changes in premiums for percentage changes in premiums
for each individual state.for each individual state.8990 ( (See Figure 1.)

8284 42 U.S.C. §4022(b)(1). 42 U.S.C. §4022(b)(1).
8385 See FEMA, See FEMA, NFIP Community Rating Coordinator’s Manual 2017, at https://www.fema.gov/sites/default/files/, at https://www.fema.gov/sites/default/files/
documents/fema_community-rating-system_coordinators-manual_2017.pdf. documents/fema_community-rating-system_coordinators-manual_2017.pdf.
8486 Email correspondence from FEMA Congressional Affairs staff, October 22, 2020. Email correspondence from FEMA Congressional Affairs staff, October 22, 2020.
8587 FEMA, FEMA, Risk Rating 2.0: Equity in Action, at https://www.fema.gov/flood-insurance/, at https://www.fema.gov/flood-insurance/~~work-with-nfip/risk-rating.~~
86risk-rating. Previously only properties in the SFHA received the CRS discount. 88 Email correspondence from FEMA Congressional Affairs staff, January 25, 2021. Email correspondence from FEMA Congressional Affairs staff, January 25, 2021.
8789 Email correspondence from FEMA Congressional Affairs staff, October 21, 2020. Email correspondence from FEMA Congressional Affairs staff, October 21, 2020.
~~88 FEMA, Risk Rating 2.0—National Rate Analysis, at https://www.fema.gov/sites/default/files/documents/fema_risk-~~
~~rating-2.0-national-rate-analysis.pdf.~~
8990 FEMA, FEMA, Risk Rating 2.0 State Profiles, at https://www.fema.gov/flood-insurance/, at https://www.fema.gov/flood-insurance/~~work-with-nfip/~~risk-rating/profiles. risk-rating/profiles.
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Figure 1. Percentage Change in NFIP Premiums by State Under Risk Rating 2.0

Source: Calculated by CRS from state profiles at https://www.fema.gov/flood-insurance/Calculated by CRS from state profiles at https://www.fema.gov/flood-insurance/~~work-with-nfip/~~risk-rating/profiles. risk-rating/profiles.
CRS- CRS-17

~~link to page 17~~ 14 National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0

~~FEMA has released figures for percentage changes in premiums for each individual state.90 (See~~
Figure 1.) According to FEMA, at the national level, 23% of policyholders would see immediate decreases in their premiums.91 For the first year of Risk Rating 2.0 implementation, FEMA has set an annual cap of For the first year of Risk Rating 2.0 implementation, FEMA has set an annual cap of
$12,125 as the maximum amount that any single-family primary residence would be required to $12,125 as the maximum amount that any single-family primary residence would be required to
pay. According to FEMA, the maximum that a single-family primary residence currently pays is pay. According to FEMA, the maximum that a single-family primary residence currently pays is
$45,925.$45,925.9192 This is the first time that NFIP premiums will be subject to a cap. According to FEMA, This is the first time that NFIP premiums will be subject to a cap. According to FEMA,
75% of primary residences would see an increase greater than 18% if the statutory limit did not 75% of primary residences would see an increase greater than 18% if the statutory limit did not
exist. FEMA estimates that 50% of policies will be at their full risk rate after exist. FEMA estimates that 50% of policies will be at their full risk rate after ~~five~~5 years and after years and after
10 years, 90% of policies will be at their full risk rate.10 years, 90% of policies will be at their full risk rate.~~92 Policyholders~~93 Renewing policyholders may choose between the new and old rating methods until April 1, 2020, giving policyholders whose premiums decrease whose premiums decrease
under Risk Rating 2.0 under Risk Rating 2.0 ~~would be able~~the option to move to the new lower premiums to move to the new lower premiums ~~immediately after~~
~~October 1, 2021, without waiting for the wider introduction of Risk Rating 2.0 in April 2022.93~~on renewal. After April 1, 2022, all policies will be priced using Risk Rating 2.0 methodology.94
Concluding Observations
FEMA believes that the more transparent and accurate flood insurance pricing in Risk Rating 2.0 FEMA believes that the more transparent and accurate flood insurance pricing in Risk Rating 2.0
will lead to better risk communication and an increase in flood insurance take-up rate. FEMA has will lead to better risk communication and an increase in flood insurance take-up rate. FEMA has
~~not yet provided any information on the types of properties, or the locations of properties, which~~
~~it projects will see an increase in premiums under Risk Rating 2.0. However, certain~~provided information on premium level changes at the county level and zip code level, with downloadable data.95 Certain types of types of
properties may be more likely to be affectedproperties may be more likely to be affected by Risk Rating 2.0, either positively or negatively. These may include , either positively or negatively. These may include
zone-grandfathered properties, properties which are currently on the border of flood zones, zone-grandfathered properties, properties which are currently on the border of flood zones,
properties currently outside the SFHA at risk of pluvial flooding, and properties with above-properties currently outside the SFHA at risk of pluvial flooding, and properties with above-
average or below-average replacement cost values. For example, the use of distance to water, average or below-average replacement cost values. For example, the use of distance to water,
rather than flood zone, may mean that premiums for properties at the landward boundary of an rather than flood zone, may mean that premiums for properties at the landward boundary of an
SFHA could go down, while premiums for a property at the water boundary could go up.SFHA could go down, while premiums for a property at the water boundary could go up.9496
Risk Rating 2.0 is projected to lead to premium increases for Risk Rating 2.0 is projected to lead to premium increases for ~~the majority~~77% of NFIP policyholders, of NFIP policyholders,97
which could raise questions of affordability. When the Biggert-Waters Flood Insurance Reform which could raise questions of affordability. When the Biggert-Waters Flood Insurance Reform
Act of 2012 went into effect, constituents from multiple communities expressed concerns about Act of 2012 went into effect, constituents from multiple communities expressed concerns about
the elimination of lower rate classes, arguing that it created a financial burden on policyholders, the elimination of lower rate classes, arguing that it created a financial burden on policyholders,
risked depressing home values, and could lead to a reduction in the number of NFIP policies risked depressing home values, and could lead to a reduction in the number of NFIP policies
purchased.purchased.9598 Similar concerns may be expressed with Risk Rating 2.0. Although risk-based price Similar concerns may be expressed with Risk Rating 2.0. Although risk-based price
signals could give policyholders a clearer understanding of their true flood risk, charging signals could give policyholders a clearer understanding of their true flood risk, charging
~~actuarially sound premiums may mean that insurance for some properties is considered~~
~~unaffordable, or that premiums increase at a rate which may be considered to be politically~~
~~unacceptable.~~
~~FEMA does not currently have the authority to implement an affordability program, nor does~~
~~FEMA’s current rate structure provide the funding required to support an affordability program.~~

90 91 FEMA, FEMA, Risk Rating 2.0 ~~State Profiles~~—National Rate Analysis, at https://www.fema.gov/, at https://www.fema.gov/~~flood-insurance/work-with-nfip/risk-rating/profiles.~~
91sites/default/files/documents/fema_risk-rating-2.0-national-rate-analysis.pdf. 92 Provided by FEMA Congressional Affairs staff for CRS briefing on Risk Rating 2.0, March 29, 2021. Note that these Provided by FEMA Congressional Affairs staff for CRS briefing on Risk Rating 2.0, March 29, 2021. Note that these
numbers include premium fees, assessments, and surcharges. numbers include premium fees, assessments, and surcharges.
9293 Email from FEMA Congressional Affairs staff, April 16, 2021. Email from FEMA Congressional Affairs staff, April 16, 2021.
~~93 Ibid.~~
9494 Email from FEMA Congressional Affairs staff, October 7, 2021. 95 FEMA, Risk Rating 2.0 State Profiles, at https://www.fema.gov/flood-insurance/risk-rating/profiles. 96 For example, imagine a hypothetical V zone which starts at the ocean front and extends to two miles inland, with the For example, imagine a hypothetical V zone which starts at the ocean front and extends to two miles inland, with the
boundary between the A zone and the V zone at the two-mile mark. A property that is 1.95 miles inland which was boundary between the A zone and the V zone at the two-mile mark. A property that is 1.95 miles inland which was
mapped in the V zone should see its premium go down, whereas a property that is 2.05 miles inland, and mapped in the mapped in the V zone should see its premium go down, whereas a property that is 2.05 miles inland, and mapped in the
A zone, should see its premium go up. A zone, should see its premium go up.
9597 FEMA, Risk Rating 2.0—National Rate Analysis, at https://www.fema.gov/sites/default/files/documents/fema_risk-rating-2.0-national-rate-analysis.pdf. 98 National Research Council of the National Academies, National Research Council of the National Academies, Affordability of National Flood Insurance Program
Premiums: Report 1, 2015, p. 2, at http://www.nap.edu/catalog/21709/affordability-of-national-flood-insurance-, 2015, p. 2, at http://www.nap.edu/catalog/21709/affordability-of-national-flood-insurance-
program-premiums-report-1. program-premiums-report-1.
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National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0

~~However, affordability provisions were included in the three bills which were~~actuarially sound premiums may mean that insurance for some properties is considered unaffordable, or that premiums increase at a rate which may be considered to be politically unacceptable. FEMA does not currently have the authority to implement an affordability program, nor does FEMA’s current rate structure provide the funding required to support an affordability program. Affordability provisions are included in the two bills which have been introduced in the 117th ~~introduced in the~~
~~116th~~ Congress for long-term reauthorization of the NFIP: Congress for long-term reauthorization of the NFIP: ~~the National Flood Insurance Program~~
~~Reauthorization Act of 2019 (H.R. 3167), and the~~ National Flood Insurance Program National Flood Insurance Program
Reauthorization and Reform Act of Reauthorization and Reform Act of ~~2019~~2021 (S. (S. ~~2187~~3128) and its companion bill in the House) and its companion bill in the House, (H.R. H.R.
~~3872~~5802). A draft bill posted by the House Financial Services Committee in association with a hearing . A draft bill posted by the House Financial Services Committee in association with a hearing
on May 4, 2021, includes provisions for a demonstration program for policy affordability.on May 4, 2021, includes provisions for a demonstration program for policy affordability.9699 As As
Congress considers a long-term reauthorization of the NFIP, a central question may be who Congress considers a long-term reauthorization of the NFIP, a central question may be who
should bear the costs of floodplain occupancy in the future and how to address the concerns of should bear the costs of floodplain occupancy in the future and how to address the concerns of
constituents facing increases in flood insurance premiums. constituents facing increases in flood insurance premiums.

Author Information

Diane P. Horn Diane P. Horn

Analyst in Flood Insurance and Emergency Analyst in Flood Insurance and Emergency
Management Management

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
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9699 National Flood Insurance Program Reauthorization Act of 2021, at https://financialservices.house.gov/uploadedfiles/ National Flood Insurance Program Reauthorization Act of 2021, at https://financialservices.house.gov/uploadedfiles/
bills-117pih-nationalfloodinsuranceprogramreauthorizationactof2021.pdf; posted by U.S. Congress, House Committee bills-117pih-nationalfloodinsuranceprogramreauthorizationactof2021.pdf; posted by U.S. Congress, House Committee
on Financial Services, Subcommittee on Housing, Community Development, and Insurance, on Financial Services, Subcommittee on Housing, Community Development, and Insurance, Built to Last: Examining
Housing Resilience in the Face of Climate Change, 117th Cong., 1st sess., May 4, 2021, at , 117th Cong., 1st sess., May 4, 2021, at
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407747. https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407747.
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