Risk Rating 2.0: Frequently Asked Questions (last updated 12/22/21)

On By Lauren Pachman, Counsel & Director of Regulatory Affairs

When Risk Rating 2.0 (RR 2.0) went into effect for new (and some renewing) NFIP policies, we created this series of Frequently Asked Questions (and answers!) that we hope will help to inform and guide your decision making as you familiarize yourself with RR 2.0.

Please note: The information contained herein is current as of the date posted. FEMA is continuing to release additional guidance documents, and the material provided here may be overruled by subsequent FEMA guidance, bulletins, or other information. As always, we will provide PIA members with new information as it becomes available. If you have immediate questions, please contact your Write-Your-Own (WYO) carrier(s) for the most relevant, up-to-date information.

Q1:      What is Risk Rating 2.0?

A1:      The Federal Emergency Management Agency (FEMA) administers the NFIP, and, over the past few years, FEMA has been preparing to update the NFIP’s risk rating process using a methodology known as Risk Rating 2.0.

Risk Rating 2.0 will assign premium rates to properties using substantially more granular data, aligning rates more closely to the property’s actual level of flood risk. The implementation of RR 2.0 will move the NFIP toward solvency while also giving policyholders more information about their property’s true flood risk. With better information, policyholders may be newly encouraged to engage in mitigation efforts.

The NFIP’s financial stability has been uncertain since 2005, when Hurricane Katrina losses depleted the NFIP’s reserves and then some. For the past 16 years, the program has carried an enormous debt to the Treasury Department and has had to borrow from Treasury repeatedly to pay for severe flood losses. The NFIP currently carries a $20.5 billion debt, even though the Trump administration forgave $16 billion in NFIP debt in 2017. The program has no hope of paying down its remaining debt or achieving or maintaining financial solvency without large-scale changes like those imposed by Risk Rating 2.0 (RR 2.0).

Restructuring the NFIP’s premium rates so that they more closely align with those of the private market will help consumers. Increased involvement in flood insurance by the private market will lower prices across the board and provide consumers with a wider selection of flood insurance products, but the private market will remain at a disadvantage as long as the NFIP is not subject to risk-based pricing. If NFIP premiums remained widely subsidized, the private market would never be able to compete at scale. More robust competition will result in more options for consumers and better incentives for innovation across the industry. (Last updated 10/14/21)

Q2:      How is it different from the way NFIP policies are priced now?

A2:      RR 2.0 will consider several rating factors that are not part of the legacy rating system.

The legacy system considers the following variables:

  • Flood Insurance Rate Map Zone
  • Base Flood Elevation
  • Foundation Type
  • Structural Elevation (Special Flood Hazard Area Only)

RR 2.0 will consider these variables instead:

  • Distance to Flooding Source & Flood Type
  • Building Occupancy  
  • Construction Type
  • Foundation Type
  • Ground Elevation
  • First Floor Height
  • Number of Floors
  • Prior Claims

Your WYO may ask you, the agent, to provide these details about the properties you write NFIP coverage for, even for properties you have covered for years, because the RR 2.0 rating engine may not be able to generate a RR 2.0 quote for that property if it lacks the data to do so. (Last updated 10/1/21)

Q3:      What data sources is FEMA using in its RR 2.0 system?

A3:      FEMA has mapping data, the Great Lakes Analysis, catastrophe models, a geolocation tool, a first-floor height tool, and a replacement cost value (RCV) tool. It is also using coastal data provided by the National Oceanic and Atmospheric Administration (NOAA), levee data provided by the U.S. Army Corps of Engineers (USACE), and elevation data provided by the U.S. Geological Survey (USGS).

RR 2.0 considers a much larger set of inputs than the legacy rating methodology. Unlike the legacy methodology, it is “geospatially aware,” meaning that it accounts for a property’s distance to flooding sources. It also uses multiple elevation reference points, including elevation relative to flooding sources (like coastal or riverine risks) and elevation relative to surrounding elevations.

FEMA is also considering leveraging additional data on levees, and we will continue to update this FAQ with additional information as it becomes available. (Last updated 10/14/21)

Q4:      When does RR 2.0 go into effect?

A4:      The new rates took effect on October 1, 2021 for all new policies and for some existing policies. Existing policies with renewal dates between October 1 and March 31 will be permitted to transition to the new rates at their upcoming renewal, if the new rate is more favorable (i.e., lower) to the policyholder than their existing or “legacy” rate.

The remaining NFIP renewals (those whose rates are staying the same or increasing in the new system and those whose policies are not scheduled to renew until after April 1) will transition to the new rates at their next renewal, but no sooner than April 1, 2022.

The transition from legacy rating to RR 2.0 for policies with effective or renewal dates between Oct. 1, 2021, and March 31, 2022 is further explained in FEMA’s Industry Transition Memo (ITM). The ITM also provides guidance for NFIP agents, insurers, and vendors on how to accomplish the transition. (Last updated 10/1/21)

Q5:      Do I need to use a different Flood Insurance Manual (FIM) for Risk Rating 2.0?

A5:      Yes. FEMA has issued a Risk Rating 2.0 FIM that is meant to be used for policies being issued using RR 2.0 rates. Here are the links to the front matter and appendices of the RR 2.0 FIM:

FEMA has also provided an updated version of the existing FIM (originally published on April 1, 2021) to use when working with policies that are being issued using the previous, or “legacy” rating system. The FIM for legacy-rated policies also includes a special attachment that updates the guidance for Oct. 1, 2021 and later.

There are two ways to access the April 1, 2021 FIM:

Remember to consult Attachment A of Bulletin W-21013 for guidance on policies with effective dates between Oct. 1, 2021 and March 31, 2022. (Last updated 12/17/21)

Q6:      Do I need to work with both FIMs at the same time now? How will I know when to consult each?

A6:      Yes. Until April 1, 2022, the two FIMs—one for each rating methodology—will be in effect simultaneously. Both will remain in effect until April 1, 2022, at which point only the RR 2.0 FIM, like the RR 2.0 methodology, will remain in effect.

Here is some additional information that may be helpful:

When to Use the FIM Effective April 1, 2021 (with October 2021 update):

This edition of the FIM should be used for rating policies with effective dates between Oct. 1, 2021 and March 31, 2022 that are renewing using the legacy pricing methodology. This FIM should be used in conjunction with Attachment A of Bulletin W-21013 to make the required language substitutions, additions, and deletions.

This FIM should not be used for RR 2.0 rating; all policies issued using RR 2.0 must use the guidance found in the RR 2.0 FIM.

When to Use the Risk Rating 2.0 FIM:

This edition of the FIM should be consulted when working with NFIP policies using RR 2.0. It should be used for rating new business policies with effective dates on or after Oct. 1, 2021. It should also be used for renewing policies with effective dates between Oct. 1, 2021 and March 31, 2022 that are transitioning to RR 2.0 at renewal. This version should not be used for rating using the legacy pricing methodology. (Last updated 10/1/21)

Q7:      Is there a way to find information in the new RR 2.0 FIM, using what I know about the location of that same information in the April 1, 2021 FIM?

A7:      Yes. FEMA has issued a “Roadmap to the Risk Rating 2.0 Flood Insurance Manual,” which provides information that may help you navigate between the April 2021 Legacy Flood Insurance Manual and the October 2021 Risk Rating 2.0 Flood Insurance Manual. This document provides a “crosswalk” of April 2021 legacy FIM content, alongside where to locate that content in the RR 2.0 FIM. Please see below for a description of each column within the table.

As a reminder, for policies renewing under the legacy rating plan with a policy effective date between October 1, 2021 and March 31, 2022 only, please use the April 2021 Flood Insurance Manual, and consult Attachment A to make required language substitutions, additions, and deletions. The April 2021 Flood Insurance Manual with the October 2021 update is applicable only for policies renewing with a policy effective date between October 1, 2021, and March 31, 2022. All policies issued using Risk Rating 2.0 must use the RR 2.0 Flood Insurance Manual. (Last updated 10/1/21)

Q8:    Why does the rating engine go “down”? Is there a maintenance schedule we should be aware of?

A8:    Sometimes the rating engine goes down for scheduled maintenance; other times, the system is taken down for emergency or unscheduled maintenance, which can happen without warning. Even FEMA representatives will not always know about unscheduled maintenance in advance.

All that said, regular maintenance of the PIVOT system, which does not necessarily always affect RR 2.0, occurs every other Thursday at 8PM Eastern; its scheduled maintenance will next take place on Dec. 30. The length of time the system is down for routine maintenance varies, depending on the complexity of the work being done.

WYO or vendor issues can also cause the system to become inaccessible to agents. If you are experiencing problems that agents using other WYO or vendor systems are not, you may want to contact your WYO to obtain more information about the issue.

Finally, technical support for PIVOT, which houses RR 2.0, is available 24 hours a day, seven days a week. (Last updated 12/17/21)

Q9:    What are provisional rates? How are they different from the rates the system gives me the rest of the time?

A9:     Provisional rates are provided by the rating engine when it is unable to generate premium quotes. Policies that use provisional rates are valid only for one policy term; they cannot be renewed. Provisionally rated policies can be endorsed during the policy term, or via a new application at renewal, to get a rating engine rate. The carrier must submit the endorsement to FEMA for a premium before a claim payment can be generated after a loss.

When endorsing to a rating engine rate from a provisional rate, no waiting period applies, unless the policyholder seeks higher or additional coverage, in which case only the new coverage is subject to the waiting period, consistent with the guidance in the RR 2.0 FIM’s Section 4 (“How to Endorse”).

Provisionally rated policies cannot be rewritten as another provisionally rated policy, and a provisionally rated policy cannot be endorsed to increase coverage until the policy is endorsed to a rating engine rate. Additionally, provisionally rated policies are not eligible for Community Rating System (CRS) discounts that might otherwise be available.

To minimize the risk of nonrenewal of NFIP policies, FEMA recently issued Bulletin W-21030, which allows the use of provisional rates to generate renewal notices for Phase II (April 1, 2022) RR 2.0 renewals. Provisional rates can be used for any policy renewing with an expiration date of April 1, 2022 through March 31, 2023. The Bulletin advises insurers to follow the provisional rate guidance in the RR 2.0 FIM; carriers are responsible for communicating with agents and policyholders about the use of provisional rates.

FEMA recommends carriers endorse provisionally rated policies to a rating engine rate within sixty (60) days of the submission and, according to the Bulletin, FEMA expects carriers to communicate with policyholders and agents about the effects of using provisional rates.

Finally, the Bulletin invites further questions about the RR 2.0 Phase II renewal process at NFIPUnderwritingMailbox@fema.dhs.gov. (Last updated 12/17/21)

Q10:      As I gain familiarity with the RR 2.0 rating engine, I am noticing that quotes for many properties—both new and renewing—are exponentially higher than I expected them to be. I’m seeing rates that are doubling and tripling! What is going on? Help!

A10:      First, you are not alone. We often hear variations on this message from agents, and it appears as though several different issues are contributing to this problem.

  1. RR 2.0 considers many more rating variables than the legacy system does. With the amount of data going into the system, RR 2.0 is revealing that the legacy system grossly underestimated the flood risk associated with many properties.
  1. Risk Rating 2.0 is designed to eventually move all NFIP policies to risk-based pricing—pricing that accurately reflects the flood risk associated with the property the policy is protecting. In the legacy methodology, many policies were priced in a way that was not commensurate with the insured property’s level of flood risk. This manifested itself in ways that harmed consumers, with premiums that were higher than they should have been and benefited consumers, with premiums that were lower than they should have been.

In the long term, RR 2.0 is designed to address these injustices. In the short term, agents are being asked to explain to their insureds what they can expect to happen and why, which is not easy. Insureds with properties whose premiums were priced lower than their flood risk would have indicated should be prepared for their premiums to increase when they move to RR 2.0. Those insureds will move to RR 2.0 at their next renewal on or after April 1, 2022. Insureds with properties whose premiums were priced higher than their flood risk would have indicated should be prepared for their premiums to decrease when they move to RR 2.0, which should be at their next renewal, no matter when it is.

Anticipating which existing customers will fall into each category and preparing them appropriately is among independent agents’ biggest challenges right now. We hope the rating engine results become more predictable as time goes by and FEMA refines the system.

  1. The new system is available now for all new policies and some renewing policies. Specifically, renewing policies are only subject to RR 2.0 rates if it would be beneficial to the policyholder to move to RR 2.0 now. In other words, two groups are currently being rated into RR 2.0: new policyholders, who will enter the system at their full-risk rates; and renewing policyholders whose rates are decreasing. If your existing policyholder’s rate is shown to increase using the new system, they should not be moved to RR 2.0 until their next renewal on or after April 1, 2022.

No existing policyholders should face precipitous increases as a result of RR 2.0; if the rate of an existing policyholder increases on a renewal that is effective before April 1, 2022, it should be because that rate was set to increase based on the legacy methodology. Insureds renewing before April 1, 2022 are not entitled to a premium that stays the same or decreases no matter what; they are entitled to remain in the system that produces the lower premium upon their next renewal.

If the RR 2.0 rate is even one dollar higher than a renewing policyholder’s legacy rate would be, the policyholder should be renewed using the legacy methodology. Additionally, because of the cap on rate increases, when the policyholder eventually moves to RR 2.0 at their next renewal, in general, they will not be immediately subject to their full-risk rate. There are exceptions, of course, mostly emanating from coverage lapses, and the Flood Insurance Manuals have a lot of helpful information in sections 3 (“How to Write”) and 5 (“How to Renew”) about how to apply the appropriate rating methodology after a lapse in coverage.

  1. Plus, existing statutory caps on annual premium increases should protect renewing policyholders from precipitous premium increases unless Congress passes a law to increase or eliminate the caps. The statutory caps predate RR 2.0 and are written into federal law, so they cannot be removed or increased by FEMA without Congress acting first. The premium rate caps provide a “glide path” for policyholders to pay rates that increase gradually each year until they reach full-risk rates.

Renewing policyholders will not be immediately subject to an increase to their full-risk rates when they move to RR 2.0, unless their full-risk rate represents a percentage increase that is within the applicable cap. Upon renewal into RR 2.0, some policyholders may immediately be paying their full-risk rates, if they were paying close to those rates in the legacy system. But other policyholders’ premiums will increase by a limited percentage, year after year, until they eventually pay their full-risk rate.

Based on what we currently hear on the Hill, Congress is more likely to lower the caps than to increase or eliminate them. Under existing law, renewing policyholder rates cannot increase more than 25 percent per year. The applicable cap depends on the type of policy involved, and some are subject to other, lower caps, but 25 percent is the maximum allowable increase for any NFIP policy.

  1. Additionally, of course, agents have been able to generate quotes using both systems, because renewals are being processed using both systems. Agents may be running new policies through the old system just to compare the outcomes produced by the different variables used by the two systems; that exercise may provide valuable information. However, because of the number of variables that RR 2.0 uses, and the different ways it treats even variables that are considered by both systems, broad generalizations are hard to come by when discussing the relationship between the two systems.
  1. Among agents that work with more than one WYO, we have also heard from agents who, after generating a quote that seems unusually high, try to test its accuracy by trying to recreate it using another WYO’s system. In some instances, they are unable to do so, meaning that different WYOs are generating different quotes on the exact same properties. Sometimes this can be caused by a mistake somewhere along the line. The agent may have inadvertently entered different data the second time, or one of the WYOs’ systems may have a global error that is affecting many of its quotes. Agents who have these experiences should report them to the WYOs at issue so that global errors can be identified and corrected.

One of the many downsides to the fact that each WYO is operating independently of FEMA and one another is that agents can only do that comparison—and potentially reveal a vital problem in need of repair—if they are working with more than one WYO. If an agent only works with one WYO, they are stuck with the mysteriously high quote; they don’t have a way to compare it to a quote from a different WYO.

For all these reasons, it is possible—and, anecdotally, it seems common—for agents to find that the RR 2.0 system generates a shockingly high quote on a new policy, because new policyholders do not have access to a cap, other than the overall cap on annual premium (see Q/A 18).

By offering insureds a more granular and specific estimate of their flood risk, RR 2.0 may encourage them to consider more proactively undertaking mitigation efforts and other improvements. (Last updated 12/17/21)

Q11: What can we tell our clients about how RR 2.0 will help them?

A11:   The most specific information you can provide to clients about the effect of RR 2.0 on them is likely contained in the state- and zip-code-level data posted on the RR 2.0 site. That data will help you prepare the message for each of your audiences, and it could help you predict with greater accuracy what effect the RR 2.0 rating factors will have on your clients (see Q/A 10).

Q12:      I heard some agents were trained on the new rating engine by FEMA. Can I be trained by FEMA too?

A12: Yes! You can find the dates and times of FEMA’s December agent-oriented training sessions, and register for remaining sessions, here. A November 30, 2021 PowerPoint presentation used at those sessions is available here, although agents may find some of the information contained in the PowerPoint confusing or misleading without context.

Additionally, FEMA is expecting to post at least one training video online in the next several weeks. We will link to those as they are made available. (Last updated 12/22/21)

Q13:      Will I need to use new forms to use Risk Rating 2.0?

A13:      Yes. Here are several of the Risk Rating 2.0 Pricing Methodology Underwriting Forms you will need:

(Last updated 12/17/21)

Q14:      Is there a new NFIP claims manual?

A14:      Yes. As of Oct. 1, 2021, the NFIP Claims Manual has changed, and the new claims manual, along with a table of changes from the prior version, can be accessed here. (Last updated 12/17/21)

Q15:      Are elevation certificates (ECs) still being used?

A15:      Yes, but ECs are not required for agents to generate quotes or policies using RR 2.0, nor are they required to purchase an NFIP product. An EC can still be provided by a prospective insured, and an agent can enter its data into the RR 2.0 system, to see if it will lower the insured’s premium.

FEMA is not using ECs on all properties for rating purposes. Instead, FEMA will use its tools and resources to determine the first-floor height of a building, which will be one factor used to calculate rates. That said, ECs are still being used to help inform mitigation actions that will lower flood risk. For example, an EC shows the location of a building, its Lowest Floor Elevation (LFE), its building characteristics, and flood zone. This information can be used to ensure compliance with community floodplain management building requirements, which can affect eligibility for CRS discounts.

ECs can also be used to support requests for a Letter of Map Amendment (LOMA) or Letter of Map Revision based on fill (LOMR-F). The process for seeking a LOMA or a LOMR-F has not changed; once obtained, a LOMA or LOMR-F can be used to change a property’s assigned flood zone, which could affect a property’s mandatory purchase status. However, LOMAs and LOMR-Fs cannot be used to reduce an insured’s premium, because flood zones are no longer used in rating. (Last updated 12/17/21)

Q16:    What will become of the Mortgage Portfolio Protection Program (MPPP)?

A16:    FEMA is ending the MPPP, which includes under 100 policies. However, the mandatory purchase requirement remains in place for properties at high risk of flood loss. (Last updated 10/14/21)

Q17:    Where can I get an overview of some of the changes I most need to be aware of?

A17:    FEMA has issued a Risk Rating 2.0 Quick Start Guide for Agents. An April 2021 “fact sheet” is also available here, but, because of its date, to the extent later FEMA material deviates from this document, please follow the most recent available FEMA guidance. (Last updated 12/22/21)

Q18:    What is the maximum cost of an NFIP premium?

A18:    Under the legacy pricing methodology, the maximum cost of an NFIP premium was $45,925 for a single-family home. In RR 2.0, the maximum cost will be $12,125. (Last updated 10/14/21)

Q19:    Can I still sell a preferred risk policy (PRP)?

A19:    No. PRPs have been discontinued and are no longer available for purchase. From now on, all new policies, including those that would have previously been considered PRPs, will be subject to RR 2.0 rates. (Last updated 10/14/21)