It seems that the Federal Emergency Management Agency [1] Risk Rating 2.0, which is changing up where and how much people are being charged for flood insurance, is impacting Texas and Florida the hardest.
FEMA’s Risk Rating 2.0 [2] raises flood insurance premiums on those who depend on NFIP to protect their homes from natural disasters through government-backed, but privately-administered flood insurance. FEMA allowed Risk Rating 2.0 to go into full effect on April 1, 2022.
Almost 90% of FEMA policyholders in Texas, Florida and Mississippi are experiencing flood insurance price increases—a higher portion than any other state and above the national average of 81% that FEMA expected to see increases.
This number, comes from Redfin [3], who predicts that 3 million single-family homes will see their flood insurance premiums rise due to how the agency overhauled its risk prediction models.
New policyholders have been subject to the overhauled pricing methodology since Oct. 1, 2021. Policyholders experiencing premium decreases also began seeing changes take effect in October 2021.
This new risk model comes at a time when the populations of Florida and Texas have been swelling, increasing the cost burden of more homeowners, which affects affordability.
“Nationwide, over three-quarters (81%) of single-family home policyholders are set to see their flood-insurance premiums rise, starting April 1,” Redfin said. “The remaining 19% are seeing decreases. Of the policyholders experiencing increases, most (88%) are seeing annual premiums rise by up to $120, while 9% are facing increases of $120 to $240 and 4% are seeing jumps of $240 or more.”
The good news for homeowners is that potential increases are capped by law at 18%. The bad news for homeowners is that these increases, while small, are likely to continue occurring over the next decade until FEMA reaches “full risk rate.” This rate will be achieved by 50% of policies at five years and 90% at 10 years.
“Most policyholders probably won’t feel the burn of FEMA’s price hikes in year one, but by year five or 10, the elevated cost of flood insurance could impact where Americans decide to buy and build homes,” said Redfin Senior Economist Sheharyar Bokhari. “Some people may choose not to renew their flood insurance policies despite increasing flood risk due to climate change, especially as inflation drives prices up elsewhere in the economy as well. Others may just move to less risky places where flood insurance isn’t required.”
Texas, Florida have highest share of policyholders facing price increases
- There are six states where more than 81% (the national share) of policyholders are seeing increases—all of which face substantial flood risk. In Texas, 89% of policyholders are seeing premiums rise—a higher share than any other state. Next comes Florida (88%), Mississippi (87%), Alabama (85%), West Virginia (84%) and Louisiana (83%).
- In four of those six states—Texas, Louisiana, Mississippi and Florida—homeowners have been paying less for flood-insurance than the typical U.S. policyholder ($645). The typical policyholder in Texas paid $504 as of May 2020—the lowest of any state. The average premiums in Louisiana, Mississippi and Florida were $564, $566 and $615, respectively—the sixth-, eighth- and eleventh-lowest in the country.
- All of the states mentioned above are expected to grapple with increased flood risk in the coming years. As of 2020, 1 in 4 properties in West Virginia and 1 in 5 properties in Louisiana and Florida faced substantial flood risk—more than any other states, according to First Street Foundation.
- In Texas and Alabama, about 1 in 10 properties faced substantial risk—roughly in line with the national average. That said, Texas is home to some of the most flood-endangered cities in the nation. Houston has 75,000 properties with substantial risk, the fourth-most in the country.
Hispanic neighborhoods most likely to see premiums rise
- Majority-Hispanic neighborhoods are more likely to see their flood-insurance premiums rise than any other major ethnic or racial neighborhood group, with 84% of policyholders facing increases. That’s likely because Texas and Florida—the states hit hardest by FEMA’s overhaul—have the largest Hispanic populations behind California.
- Neighborhoods that are majority American Indian and Alaskan Native are the least likely to see premiums climb, with 67% of policyholders facing increases. Next comes neighborhoods that are majority Native Hawaiian and Other Pacific Islander, at 69%.
- All other groups were roughly in line with the national average, with about 80% of policyholders facing increases.
Neighborhoods with higher home prices most likely to experience premium increases
- In general, areas with higher home prices are seeing a larger share of policyholders face premium increases. The agency said that many policyholders with lower-value homes have been paying more than they should and policyholders with higher-value homes have been paying less than they should.
- Interestingly, though, places with the highest earners are seeing a relatively small share of policyholders face price hikes. In neighborhoods where the median household income is $200,000 or more, 76% of policyholders are seeing premiums rise—below the national average. That’s roughly the same share as neighborhoods where the median income is under $20,000.