Disseminating Flood Risk Information in the USA through Risk Rating 2.0

Federal Emergency Management Agency (FEMA) introduced Risk Rating 2.0, a new risk-based premium approach, on October 1, 2021, for new policies and on April 1, 2022, for existing policies. Risk rating 2.0 considers the geographic attributes (e.g. distance to the lake, river, coast), building attributes (e.g. foundation type, first-floor height), and policy attributes (e.g. coverage and deductible limit) by coverage (i.e., building and contents) and perils (i.e., pluvial and fluvial flooding, storm surge, tsunami, great lake, and coastal erosion) to estimate risk premiums. In this review study, we conduct exploratory data analysis and visualization of the rating factors released by FEMA to better understand the risk premium. The associated rating factors are multiplied and summed by coverage to get the initial premium without fees for each structure. As the rating factors are multiplicative, lower factors contribute to lower risk premiums. The rating factors decrease with increasing distance from flood sources.

The states in the USA are categorized into five segments (e.g. Gulf coast states are categorized as segment 1). A base rate is applied to each state by single-family home indicator and perils for levee and non-levee protected areas. The factors are then distributed by territory where each HUC12 is assigned a factor by peril. Inland flood from pluvial and fluvial sources is applicable for all the states where single-family homes are not levee protected. The effect of the inland flood is considered for structures in segment 1 where the distance to the river is less than 13,500 meters. Storm Surge flooding is considered within 11,000 meters of the Gulf coast for non-barrier islands. Tsunami flooding is considered for structures located in coastal CA, OR, WA, AK, AS, GU/MP, and HI. Great Lake flooding is considered for structures located within 8,500 meters of the Great Lake. Coastal erosion is considered for structures located within 100 meters of the coastline.   

The elevation of a structure is an important indicator for estimating risk premium. The higher the elevation of the structure relative to flood sources, the lower the risk factors. The occupancy affects the premium where single-family home masonry structure has a lower rating factor than frame structure. A higher floor of interest has lower factors, lowering the premium for all perils except coastal erosion. The foundation type also affects the factors where Slab foundation has lower factors than Crawlspace foundation, hence lower risk premium. Another addition is elevating the machinery and equipment above the first floor which reduces the initial premium without fees by 5%.  

Individual and community level flood mitigation reduces risk rating 2 insurance premium. Elevating first-floor height (FFH) to 1, 2, and 3 feet above ground reduces the initial premium without fees by 10, 19, and 27.1 percent, respectively, compared to FFH of 0 feet. Community Rating System (CRS) discount reduces the initial premium without fees between 5% to 45% based on CRS class. The information presented in this study will help homeowners, community developers, and government agencies to understand the effect of each attribute on risk premiums.