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By Paul Reynolds
August 20, 2021
Large House In the Middle Of A Flood
Money; Getty Images

It’s the peak of the Atlantic hurricane season, or close to it, but that’s not the only reason to consider getting flood insurance now. New rules for federal flood coverage mean that homeowners who don’t act soon could pay more for a policy.

FEMA says that more than three-quarters of the 5 million or so homeowners with policies under the National Flood Insurance Program are likely to pay more for that coverage after the changes kick in (on October 1 for new policyholders and April 1 for those who currently have coverage.) NFIP policies cost an average of about $1,800 a year, and the rate increases could top $240 a year for some homeowners.

Unsurprisingly, the higher premiums have raised concerns, including from Sen. John Kennedy (R-La.), who told his fellow senators that “a lot of my people can’t afford” to pay more for flood insurance, and the complex changes were little more than “a very clever way” for FEMA to raise premiums.

FEMA and other experts, though, say the new system will be more fair and equitable. As the chart in the next section shows, the agency says the hikes most homeowners will face will be modest -- no more than $10 a month. And more than one in five policyholders -- many of them in relatively modest properties -- will actually pay less for coverage. A lot less, in fact, since premiums for these people will drop by an average of $86 per month. Just 4% of policies will rise by $20 or more per month, although the agency did not provide an average increase for that group.

Here’s a rundown of who will pay more (and less) for flood insurance under the new rules, and why those who are considering coverage should plan to get -- or at least price -- a policy before October.

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Winners and losers from the changes

The update, which FEMA calls Risk Rating 2.0, is the most sweeping change to the NFIP since the program was launched in 1968 to protect property against flooding, which regular homeowners insurance does not do.

In recent years, private insurers have begun to compete with the NFIP by employing new weather data and sophisticated flood modeling to better predict the likelihood of any one property flooding. The new FEMA scheme will employ some of those advances to reduce reliance on FEMA’s historical -- and sometimes out-of-date -- neighborhood flood maps to determine premiums.

Among other changes, the new risk ratings will consider the home’s elevation and proximity to large bodies of water. As a result, rates could drop for, say, a hilltop home within a flood-prone neighborhood, which at present could have a comparable premium to a similar property that’s down the hill and beside the river.

And where rates now tend to be consistent for all residences at a single address, those who live on the upper floors will now get credit for the lower likelihood that their property will flood, says Lindsey Erickson, CEO of National Flood Services, a company that trains and supports insurance agents in selling flood policies.

Rates will also more heavily reflect a property’s replacement value than at present. That makes the owners of beachfront mansions among the likely losers from the new ratings programs -- because of both a bigger emphasis on a home’s location and a bigger emphasis on the cost of replacing it. So, too, will be those with any other home, even a modest one, that’s in a risky location -- like the neighbors, in the example above, who live by the river below that hilltop home.

Source: FEMA

What current policyholders should do

If you currently carry flood insurance, you can relax, at least for a time, since the impact of Risk Rating 2.0 will not fully kick in for you until April 1 2022. Until then, when your current annual policy expires, Erickson explains, you have the option to renew at either the premium under the current ratings scheme, or under the new one, determined by the Risk Rating 2.0 criteria.

Since most homeowners will face higher rates under 2.0, the odds are you won’t want to switch to the new ratings scheme before you have to do so. But since some people will get lower rates under the new system, Erickson recommends reaching out to your agent, in advance of your policy expiring, to have them run the numbers on both ratings schemes.

Any renewals after April 2022 will be under the new ratings criteria -- but with a caveat that helps those whose rates will rise. Under the program, your premium cannot rise by more than 18% per year. That means that even if your new “2.0” premium represents a bigger hike than that proportion, you’ll be shielded from the remainder until at least next year.

So if, for example, your rate was designated to increase by 25%, you’d pay 18% of it in your first renewal, and then the remaining 7% in your second -- plus any new increases due to other factors in that year. Not only that, but your hikes are also limited to that percentage in perpetuity, regardless of the cause of the increase.

While the likelihood of your rate rising is highly local, down to your specific property, FEMA has created summaries by state of the number of properties that will see rates rise and fall, and by how much.

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What new flood-insurance shoppers should do

Prospective new NFIP customers should contact their homeowners insurance agent soonest to shop for a policy. In part, that’s because those who own a property whose premium might rise under 2.0 can also benefit from the “glide path” limitation on rate hikes noted above.

Given such a hike, if you get a new policy before October 1, you’ll not only pay less for your first year but the increase when you renew -- and in all future renewals -- will also be limited to 18%. By contrast, if you took out a policy on, say, October 2nd, you’d not only pay more in your first year but be deprived of rate protection in future years, Erickson warns.

If, on the other hand, your property would enjoy better rates under 2.0, you can consider a policy that kicks in after October 1 at that more favorable rate. But Erickson still recommends talking with your agent to weigh any savings in your first year against losing the glide-path protection in subsequent ones.

She also advises asking your insurance agent about private insurance policies, since these are increasingly competitive in many states, and may offer a valuable alternative for properties that will see increases in their NFIP premiums under the new ratings scheme. “We’re seeing some pretty cool stuff coming out of the private market, and we’re pretty excited about it. If these policies help insure more people against flooding, that’s the goal, after all.”

More from Money:

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