Flood Insurance and Risk Rating 2.0 in New Orleans

The Federal Emergency Response Agency (FEMA) has created a new method of evaluating property in flood prone areas that will affect the pricing of flood insurance. FEMA’s official website claims that this new Risk Rating 2.0 is “actuarially sound, equitable, easiest to understand, and better reflect a property’s flood risk.”

But how does it actually affect property owners and flood insurance in New Orleans? There has been a lot of discussion about Risk Rating 2.0 in New Orleans and whether it is truly a good thing that will be equitable and fair, or whether it will simply raise rates. This article is going to look into what Risk Rating 2.0 is, and how it will impact the New Orleans real estate market.

What is Risk Rating 2.0 as Defined by FEMA?

Since the 1970s, flood insurance rates have been developed across the country based on measurements about the elevation of a property in a zone on a Flood Insurance Rate Map (FIRM). But it has been seen in the last several decades that this established way of doing things has been not entirely effective, as it does not incorporate all of the many flooding variables. Thus Risk Rating 2.0 was born.

Risk Rating 2.0 is not merely an adjustment to the current system, but a complete and transformational change to the way that flood insurance rates are calculated. Again, according to FEMA, this is being done to “set rates that are fairer and ensure rate increases and decreases are both equitable.”

Risk Rating 2.0 incorporates flooding data into its plans such as flood frequency, multiple flood types (including river overflow, storm surge, coastal erosion and heavy rainfall) and the distance to a water source. It also incorporates the costs to rebuild.

According to FEMA: “Currently, policyholders with lower-valued homes are paying more than their share of the risk while policyholders with higher-valued homes are paying less than their share of the risk. Because Risk Rating 2.0 considers rebuilding costs, FEMA can equitably distribute premiums across all policyholders based on home value and a property’s unique flood risk.”

What Does Risk Rating 2.0 Mean for Flood Insurance in New Orleans?

What critics of Risk Rating 2.0 say, however, is that the new system takes all subsidies out of subsidized flood insurance. And because of this, and because New Orleans and the entire state of Louisiana is prone to flooding, nearly 80% of residents (according to Senator Bill Cassiday) had their flood insurance rates increase beginning on October 1st, 2021.

According to Risk Rating 2.0, the maximum amount that flood insurance rates can increase annually is 18% up to the point where they reach market rates. That sounds fair on paper–the 18% increase cap was already established by congress prior to Risk Rating 2.0–but homeowners in New Orleans have been living under a different system for so long–a subsidized system–that the new system may price longtime homeowners out of the homes that they have owned going all the way back to the 1960s.

Congress created flood insurance in 1968 after Hurricane Betsy flooded New Orleans as a subsidized program, and this was the way that property owners bought into it. But now that storms have only gotten worse and flooding is becoming more and more of a problem, congress is seeing that this subsidized flood insurance is costing them money. And, to be fair, it is costing them more money now than it was in 1968.

The problem is that when homeowners purchased homes in southern Louisiana, many of their homes were elevated and completely clear of anything resembling a flood plain. But then as Congress began to build levee after levee on the Mississippi River and other waterways, that safety of some of these homes diminished. Congress also gave oil companies the ability to carve out canals along the coast which further damaged the flood control. And finally, we all know that climate change has changed the weather patterns producing more frequent storms that hit harder than ever.

So now that all of this has happened–by act of Congress–Congress is turning around, through FEMA, and instituting Risk Rating 2.0 which will make all of previously unrated homes in a higher risk zone.

So What is the Good and Bad of Risk Rating 2.0 in New Orleans?

To begin with, let’s look at premium increases. Risk Rating 2.0 went into place Oct 1st, 2021 for new policy holders, but it will go into place for renewal policy holders on April 1st, 2022.

The bad news is that there are going to be some homes that see increases–even dramatic increases–to their insurance premiums. There has been some effort on the part of local organizations and politicians to change this.

In neutral news, some of the things are simply staying the same: policy assumptions, newly mapped rates, grandfathered policies, and policy forms.

The good news is that it is estimated that 18% of current policy holders in the New Orleans, LA, area could see immediate decreases right away. The changes that are taking place mean that it no longer necessarily matters whether you’re in an “x zone”, and that the biggest deciding factors in insurance premiums are going to be the height of the first floor, and the distance to the body of water or flooding source.

All of this is due to Risk Rating 2.0 pricing each home individually, rather than by flood zone, which makes all of this much more accurate, scientific, and fair to homeowners.