Denis Doulgeropoulos
Your Financial Professional & Insurance Agent
Flood Insurance: Be Prepared for Rising Waters and Changing Rates
In most cases, water damage to your home resulting from a leaking pipe, a broken dishwasher, or a hole in your roof is covered by homeowners insurance (up to your policy limits). Flood damage, however, is excluded from most homeowner policies and requires a separate flood insurance policy. The water must cover at least two acres or affect two properties in order to be considered a flood for insurance purposes. Before flood insurance takes effect, there is typically a 30-day waiting period, so property owners shouldn’t wait until there is an imminent threat to buy flood insurance.
Flood Insurance and Rising Risk in the United States
Nearly 90% of natural disasters in the United States involve flooding, which causes billions of dollars in losses each year. Consequently, most flood coverage is provided through the National Flood Insurance Program (NFIP). Flood insurance policyholders should understand that the NFIP has introduced a new risk assessment model that is expected to impact premiums. Furthermore, if you plan to own a coastal or waterfront home, higher insurance costs may become a significant concern.
Accounting for Flood Risk
Mortgage lenders require flood insurance for homes located in high-risk flood areas. However, even if you own your home outright or live outside a designated flood zone, purchasing coverage remains a smart decision. In fact, approximately 20% of flood insurance claims occur in low- to moderate-risk areas. Therefore, flood risk can exist even where it may not be obvious.
To determine flood risk levels, the Federal Emergency Management Agency (FEMA) evaluates factors such as rainfall patterns, topography, tidal surges, flood control systems, and other environmental variables. Previously, FEMA based flood insurance premiums primarily on flood-hazard maps, along with factors like building elevation and age. As a result, properties within the same flood zone generally shared similar risk ratings.
Expected Rate Changes with Risk Rating 2.0
Under the updated Risk Rating 2.0 system, flood insurance premiums will reflect a more accurate and individualized assessment of risk. Consequently, the share of policyholders experiencing monthly premium changes is expected to follow this pattern:
- 23% will see a decrease in monthly premiums
- 66% will experience an increase of up to $10 per month
- 7% will see an increase between $10 and $20 per month
- 4% will face increases of more than $20 per month
Source: Federal Emergency Management Agency, 2021
Understanding Risk Rating 2.0
As of October 1, 2021, Risk Rating 2.0 began providing a more detailed view of a property’s flood risk. Moreover, the system uses additional data points such as distance from water sources and the estimated cost to rebuild a home. This improved approach allows homeowners to better understand their actual flood risk.
As a result, premiums are expected to increase for higher-valued or higher-risk homes while decreasing for lower-valued or lower-risk properties. The updated pricing structure takes effect on April 1, 2022. To ease the transition, annual premium increases for vulnerable, high-value homes are capped at 18% until the full rate is reached.
Sources: Insurance Information Institute, 2021
This information is not intended as tax, legal, investment, or retirement advice. Additionally, it should not be relied upon to avoid federal tax penalties. You are encouraged to seek guidance from independent tax or legal professionals. The content is based on sources believed to be accurate, and neither the information presented nor any opinion expressed constitutes a solicitation to buy or sell any security. This material was prepared by Broadridge Advisor Solutions. © 2022 Broadridge Financial Solutions, Inc.