By Carolyn Kousky
In a long over-due change, FEMA plans to update the way it prices flood insurance in the fall. Some members of Congress have recently expressed concern that this new approach might hurt middle-class families. Opposing rating reform is not the way to protect these families; instead, it would prevent more equitable rates from being charged and ignore the realities of climate change.
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FEMA’s current approach to pricing flood insurance is decades out of date and full of hidden cross-subsidies, including a regressive component that has low-value homes paying too much and high-value homes paying too little. FEMA’s new pricing approach—referred to as Risk Rating 2.0 — will fix this regressive cross-subsidy, as well as harness improved data and advanced modeling capabilities to better assess flood risk for each property. It will also make the policies easier to understand — a critical component.
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For the $100,000 property owner to file a claim for that much money, it would mean the house was completely destroyed in a flood. That is really rare. But for the $1 million property owner to file a $100,000 claim, it would only mean 10% of the home was damaged — which happens much more frequently. So the risk is greater for the $1 million owner and any private insurance company would, therefore, charge more.
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