With climate-related floods on the rise, FEMA is updating an algorithm that impacts 96% of flood insurance in the U.S.

The National Flood Insurance Program (NFIP) has set insurance rates in the same way since the 1970s. Over the last fifty years, however, the program has faced mounting financial issues and criticism from policymakers, fiscal conservatives, environmentalists and other stakeholders. In response, the Federal Emergency Management Agency (FEMA), the department that manages the NFIP, recently announced a new system of insurance rating: Risk Rating 2.0 is currently scheduled to be implemented in October 2021.  

According to FEMA, floods are the most common and costly natural disasters in the United States. Flood insurance is not included under standard homeowner and renter insurance, and since the market for private flood insurance is relatively small, NFIP currently provides over 96% of flood insurance in the U.S. As of December 2019, the NFIP had over 5 million policies providing over $1.3 trillion in coverage. 

However, the program has struggled to remain fiscally solvent while providing affordable flood insurance. According to the Government Accountability Office, FEMA’s debt stood at $20.5 billion in September 2018 despite Congress cancelling $16 billion in debt the year before. The Government Accountability Office has designated the NFIP as “high risk” since 2006, because emphasizing affordability created cases where premium rates did not reflect the full risk of loss and produced insufficient premiums, which in turn transferred the financial burden of individual property owners to taxpayers as a whole. Additionally, scientists have criticized this insurance rating system for reinforcing risky patterns of development.

The goal of the NFIP’s redesigned insurance rating system is to incorporate modern flood risk assessments, including private-sector data, to deliver rates that are “fairer, easier to understand, and better reflect a property’s unique flood risk,” according to FEMA. These changes also need to address FEMA’s funding issues, so although legislation limits annual premium increases to 18%, some policyholders and policymakers of heavily affected areas expressed concern over potential premium increases.

In addition to the direct impact this new rating methodology will have on the NFIP’s five million policyholders, Risk Rating 2.0 will also indirectly affect taxpayers who contribute to national programs like NFIP, and more accurate risk assessments will hopefully discourage risky development. Furthermore, the impact and importance of the NFIP will only continue to grow as global climate change continues to increase high-tide flooding in American coastal communities. 

To investigate this issue, researchers and journalists can review the Government Accountability Office’s reports on the NFIP and FEMA’s decision to postpone implementation of Risk Rating 2.0 from 2020 to 2021. Freedom of Information Act requests could be filed with FEMA to learn more about the new methodology and about what private-sector data will be used in the updated methodology. Much of the government data on flood risks are the products of other algorithms. For example, FEMA uses software like the Wave Height Analysis for Flood Insurance Studies and the Flood Risk Map to evaluate flood risk in low-lying landscapes and other areas. Investigating these tools could provide a more thorough understanding of the data and models that inform  Risk Rating 2.0.

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