The Federal Emergency Management Agency (FEMA) has announced that they will be updating the methodology the National Flood Insurance Program uses to calculate pricing. If you are a homeowner, you will be wondering why they are doing this, how it will affect your insurance policy, and what you need to do.
To explain why FEMA is updating the pricing methodology for flood insurance, we need some context as to how the system currently works.
Why FEMA Needs To Make Changes
The National Flood Insurance Program methodology is due a change. It has not been updated in 50 years. This is not in and of itself a reason to create a new methodology, but if we look at the context 50 years ago and the rates people are paying today, we can see why the change is necessary.
The average cost of flood insurance is around $700 a year and it is not part of regular homeowners insurance. Flooding is taken care of by getting cover through the National Flood Insurance Program. The value of $700 itself is not what is problematic. Rather, it is the statistics that have led to this average.
The most pressing problem is that the variance in what you will pay for flood insurance is too small. In other words, you may pay similar premiums for a $30,000 property as you would for one worth $1 million. The current methodology absurdly does not adequately take into account the amount that would be necessary to repair the particular property.
Another reason pricing needs to change is that we now have a lot more data available than when the methodology was created. It is now possible to accurately determine the risk properties of certain types face in certain regions. In other words, the probable damage to a property in case of a flood can be calculated against the likelihood of a flood.
The inadequacies in the current system have led to the National Flood Insurance Program operating in the red, with Congress having to rescue it over and over again.
Now that we understand why the methodology is changing, we can get a better idea of how your premiums might change.
How the FEMA Updates Will Impact Pricing
As mentioned, one of the major issues with the system is that people are paying similar premiums regardless of the costs they will incur if their property is damaged in a flood. Going forward, the value of a home and its contents will have a greater impact on premiums.
This will lead to people with smaller and cheaper properties paying less while owners of big, expensive properties may end up paying more. It is, however, difficult to argue against this, even if you are going to be hit with higher rates.
Another important way that pricing will be impacted is that people who own properties at a higher risk of flooding will pay more, according to their calculated risk. In some cases, the National Flood Insurance Program will stop offering full-coverage flood insurance to houses that are guaranteed to continue flooding. This is in part to encourage homeowners to move or make new arrangements to protect against flooding.
For Wisconsin residents, the FEMA data indicates that 44% of premiums will decrease in price once the changes are implemented. 51% of policies will increase in price by less than $10 per month, with the remaining 5% of policies seeing an increase of $10 or more per month.
What do you need to do?
As a homeowner, you do not need to do anything to change your flood insurance policy. The rollout of new rates will be started in October and will be carried out by FEMA and the National Flood Insurance Program.
The good news is that as a Wisconsin resident, you do not need to worry too much about pricing changes. The chances that your premium pricing will go up are low, and they are unlikely to increase by more than $10 a month.
Ultimately, the pricing methodology of flood insurance has needed this update for a long time. It is absurd that owners of homes of vastly different values have been paying similar rates all this time. The change will happen towards the end of the year and hopefully, it will be to everyone’s benefit.