Risk Rating 2.0 in the "Real World": Lessons for Commercial Agents (and Lenders)

It’s just been about two (2) years since FEMA revamped how the National Flood Insurance Program (NFIP) assesses flood risk and–by extension–how it prices it. So, with two years of data under our belts, is it time to ask what predictions did (or did not) come true? Is it time for insurance agents and commercial lenders to rethink how they approach conversations about risks, coverage, and compliance?

That answer is yes, so let’s start by looking at what actually happened following the switch from the NFIP’s original rating tables to Risk Rating 2.0.

Cost of Coverage

In an economy that has seen nearly everything increase in price over the last several years, it should come as no surprise that–for some–the price of flood insurance increased as well. But note how we said for some. Compared to the original rating tables, the more sophisticated methods that Risk Ratings 2.0 uses to assess flood risk actually resulted in lower premiums for others.

Phased Increases

Of course, some property owners were assessed to have significantly higher risk than under the old system, and with significantly higher risk comes, well, you guessed it–significantly higher premiums. Thankfully, the federal government recognized that a rapid, all-at-once increase in flood insurance premiums could “sink” (no pun intended) many of the businesses that the policies were supposed to protect, and so it devised a plan to phase-in the price increases over a period that could last up to ten (10) years.

But there’s one big catch.

The Importance of “Continuous Coverage”

For commercial property owners, the phasing in of higher flood insurance premiums included the requirement that there be no lapses in coverage. Should an existing policy at any time lapse, the renewal goes straight to the full risk rate.

One challenge, however, lies in the fact that most agents and insureds don’t know why premiums are increasing or what the eventual full premium will even be, making financial planning difficult and clouding the decision of whether shopping for a less expensive policy is worthwhile.

Lessons and Takeaways for Commercial Agents

The first takeaway for Commercial Agents involves the importance of having a conversation with insureds about continuous coverage. But, ultimately, this conversation is the last item in a string of actions that includes monitoring every account and being up-to-date on the status of coverage and renewals.

The second takeaway is to shop around on behalf of your insureds. Under Risk Ratings 2.0, premiums can increase up to 25% annually on their way to full actuarial rates. But the NFIP isn’t the only game in town–and, it’s often not the best game to be playing in the first place.

Let’s dig into that a little bit: The NFIP pays commercial flood claims at “actual cash value.” whereas AFR Services can provide less expensive options and pay claims at replacement cost value. AFR Services can also offer additional types of coverage that are unavailable through the NFIP such as:

• Excess Limits (above that of the NFIP)
• Improvements and Betterments
• Business Interruption 

Lessons and Takeaways for Commercial Lenders

There are no winners when commercial flood insurance accidentally lapses, but there are certainly losers–and lenders aren’t spared. Because a post-lapse policy renewal (at least under the NFIP) would immediately shoot up to the “real risk rate” under 2.0.  As a result, borrowers could find themselves locked into a property they can no longer afford to insure, and that’s bad news for lenders.

AFR Services offers a technology-based insurance tracking service that can prevent an accidental lapse in coverage, even giving lenders the ability to place coverage on the property if such a step becomes necessary.

Summing it Up

Whether you’re a commercial insurance agent or a lender, it’s important to stay on top of how Risk Ratings 2.0 affects your customers–and you!

At AFR Services, we are the experts in flood insurance solutions for both agents and lenders. Our 30+ years in the business has given us knowledge and insight that are unmatched in our industry, and we’ve turned that knowledge into a suite of software solutions that save our clients time and money–and lower their risks.

Reach out to AFR Services today to discuss how we can help your business.