Conversations about Risk Rating 2.0
Part IV with Gail Moldovan-Trujillo and Lisa Sharrard
June 3, 2022
The Wharton Risk Center is undertaking a series of interviews with experts on the new pricing approach for the National Flood Insurance Program (NFIP), called Risk Rating 2.0. For today’s post, we spoke with two flood insurance agents—on opposite coasts of the country—about what they are seeing as the new pricing approach has been rolled out. We spoke with Gail Moldovan-Trujillo with Hagan Hamilton Insurance Solutions, based in Oregon, and Lisa Sharrard, Principal of Choice Flood Insurance LLC, based in South Carolina.
Gail, could you begin by explaining your role as a flood insurance agent?
Gail: My role as an agent is to help consumers with their flood insurance needs, whether answering questions about their risk or helping identify mitigation options to lessen their risk. Although I do provide flood insurance when needed through the NFIP or a private flood insurance company, I most enjoy providing education. I have worked as a NFIP contractor trainer providing education to Agents & Lenders as well as a consultant to many cities and countries.
And Lisa, could you tell us a bit about your background?
Lisa: I am a former state coordinator and past chair of the Association of State Floodplain Managers. I left public service and became a trainer for the NFIP Direct, teaching underwriters. After NFIP reform legislation was adopted in 2014 (Biggert-Waters), I opened a consulting business. I am a full service, flood-only agent. We offer construction services and help with Letters of Map Change through our consulting business, and flood insurance through our agency.
How have you seen your customers respond to Risk Rating 2.0?
Gail: It is still a bit too early to tell. I think this question will be better answered after a full year of its roll-out, which began for new business in October of 2021. Since flood insurance is generally purchased at the time of a new home purchase, consumers who have not purchased these policies before don’t know the difference in pricing.
April 1, 2022, was the roll-out for those that already had a flood policy. In Oregon, some rates seem to be very favorable compared to prior rates, whereas in other areas, the rate increases are the highest they can increase in a single year and will likely go up more in the future to reach full risk rating. This is very alarming for many clients, especially those on a fixed income.
Another change is that clients who in the past procrastinated in paying their renewal are shocked to find out that they only have a 30-day grace period, down from 90 days, and, the policy has to be rewritten to the full risk rates of 2.0.
Lisa: I’ve only had one customer complaint so far, but it has not been that long since the new rates have been in effect. I am seeing that X zone policies that used to be fairly inexpensive are now much higher. I have also seen some properties where premiums have decreased. There are some places where the rates are not refined enough. For example, in one area with a dam, the premiums did not seem to include that flood protection. I’m also finding many people are underinsured.
Has the new rating system made it easier or harder for flood insurance agents to help customers? Has it changed how you discuss flood risk?
Lisa: The new rating system has made it easier to help clients. But explaining the risk and mitigation is more difficult. The mitigation discounts are not intuitive. For instance, flood vents are no longer as cost beneficial, but their presence does offer relief of hydrostatic pressure. Also, the benefits for elevation are now relative to the height of adjacent land, not the base flood elevation (the estimated height of floodwaters in a 100-year flood). This seems less connected to the risk. Because of these things, perceived risk and the benefits of mitigation do not necessarily equate to insurance savings. If FEMA could build a portal that would provide estimates of savings from mitigation, that would help people.
Gail: Under the new system I’m seeing NFIP rates come back differently depending on which company you rate it with, ranging from a few hundred dollars to over a thousand dollars. This is scary because in the past you could always count on the rates being the same from carrier to carrier if it was an NFIP policy. Also, the benefits to mitigate damage from proper venting went from thousands of dollars to such a small amount there is no incentive to install flood vents.
Lisa: Rate changes used to only be a couple of times a year. Now they will happen much more frequently.
Gail: Because the rates are changing more frequently, it’s hard to give potential new homebuyers an estimate they can count on. Many new buyers will do their due diligence to make sure they can afford the insurance before they finalize the offer, but with RR2.0 the rate might not be stable.
Do you think Risk Rating 2.20 changes when or where private flood policies are preferable for customers?
Lisa: Yes, there will always be a subset of policyholders that can benefit from private coverage. Risk Rating 2.0 makes more policies competitive with the private market.
Gail: Yes and no. I often see that private flood policies offer broader coverage for contents in a basement or loss of use and could be 30-40% less in premium. An ongoing problem, though, is that the homeowners who take out FHA (Federal Housing Agency) or VA (Veterans Affairs) loans are not allowed to buy private flood insurance and are forced to get the federal policy; sometimes it is up to 2 or 3 times higher. This is bad because low-income clients are the ones that need to be able to choose the most affordable policy and they can’t because they can’t afford a conventional policy.
What education or instruction do you think would be helpful for your clients or the general public to receive so that they can be more aware of the changes induced by the Risk Rating 2.0 and purchase the most suitable insurance?
Gail: Most people don’t pay attention to their insurance rates—both homeowners and flood—since they are often paid by the lender. People generally don’t notice that premiums increase until they get a letter from their lender saying there isn’t enough money in their escrow account and their house payment is going to make up the difference. By then it’s too late. Consumers need to be more aware and not just think “oh, my bank pays it.” They should be looking at those renewal offers and statements.
Lisa: Better consumer information on mitigation could help people lower their risk and the premium. An online tool that made it easy for people would help.