What Is a Preferred Risk Policy from FEMA?
- What Is a Preferred Risk Policy from FEMA?
If your lender doesn’t require it, you may be tempted not to get flood insurance. To help citizens not go unprotected from costly floods, the Federal Emergency Management Agency, which is the largest flood insurance provider in the United States, offered discounted policies for people outside of high-risk flood zones, also known as special flood hazard areas.
These discounted policies were called preferred risk policies (PRPs). FEMA offered them because they ultimately didn’t want people to rely on grants and disaster relief after a major flood like so many uninsured must do after a catastrophe.
What Is an NFIP Preferred Risk Policy (PRP)?
A preferred risk flood insurance policy from the NFIP, the National Flood Insurance Program, had the same coverage as a standard flood insurance policy at a more affordable rate. PRP policies were only available to property owners in low-to moderate-risk flood zones.
For residential properties, both standard-rated and preferred risk policies offered up to $250,000 of building coverage and $100,000 of contents coverage. But, PRPs offered this protection at a lower rate.
Basically, preferred risk policies were a way for the NFIP to encourage those outside high-risk flood zones, where flood insurance is required, to buy flood insurance. It was more than just a marketing scheme, though. Properties outside flood zones can still flood. And they do, often. Over 20% of NFIP claims come from zones outside of high-risk flood zones.
Without flood insurance, you’d either have to pay out of pocket, take out loans to repair and replace flood-damaged items, or ask FEMA for disaster assistance. Disaster assistance comes in the form of loans that must be paid back with interest or FEMA grants that provide about $5,000 on average per household. In comparison, the average flood insurance claim in 2018 was $42,580, so you can see how much more protection an NFIP flood insurance policy can offer.
FEMA is continually updating its flood maps and assessing property risks nationwide. The agency recently launched a new methodology called Risk Rating 2.0. This will transform rates for almost all policyholders due to the inclusion of new variables and risk factors when calculating flood insurance premiums.
Under this new system, Preferred Risk Policies are being phased out. When a PRP policy is renewed under Risk Rating 2.0, if the full, new risk-based rates are greater than the PRP rate, the premium will increase until it reaches the full risk-based rate. Typically, your premium cannot increase more than 18% per year, but your rate will likely go up to some degree.
But, if the new rate under Risk Rating 2.0 is less than the PRP rate, the lower premium will be charged at renewal. Any new policy obtained after October 1 of 2021 will be subject to the new rating methodology, and all remaining policies will be subject to Risk Rating 2.0 by April 2022.
Before Risk Rating 2.0, you’d need to satisfy a few criteria to be eligible for a PRP):
- Your home needed to be in a low-to-moderate risk flood zone. These zones begin with the letters B, C, and X on FEMA’s flood rate maps. If your home is in a zone that begins with an A or V, high-risk zones, you typically weren’t eligible for a PRP.
- You can’t have received two separate flood insurance claims in the past 10 years over $1,000. Or, you can’t have received three or more flood insurance claim payments for separate losses, regardless of their amount. You also may not be eligible for a PRP if you have received some FEMA federal disaster relief payments in the past, too.
You could also convert your standard policy to a PRP if you learned that your home had been rezoned from a special flood hazard area to a lower risk zone. You’d need some documents to do so, such as a FEMA letter of map amendment. You also might need an updated elevation certificate.
When you converted your standard policy to a PRP, you received a refund for the difference in policy costs. The standard policy’s premium is used to cover the lower PRP premium, and you then you should have received a refund of whatever is left over after your PRP premium is paid.
The normal deductible for a PRP was $1,000 each for both building and contents coverage if the building coverage is less than or equal to $100,000. If the building coverage is over $100,000, the deductible was $1,250. A contents-only preferred risk policy had a $1,000 deductible.
This was lower than the deductibles on standard-rated policies, which can reach up to $5,000 or more and can have different deductibles for building and contents.
Preferred Risk Policy (PRP) Rates
FEMA is continually updating its rate maps and policy costs in an attempt to remain solvent. Depending on the number of flood claims, claim payments, and government funding changes each year, the NFIP regularly has to change its rates. In 2021 and 2022, preferred risk policy rates will be increasing.
In 2021, with the maximum $250,000 of residential building coverage and $100,000 of contents coverage, your PRP rate is likely $496 (if your coverage is below the max limits, it should be less). In 2022, PRP rates for the same coverage should increase to $570. Again, if your policy has lower limits than the maximum available, your premium will increase to a lesser extent.
The NFIP is rolling out rate changes for everyone in the coming years, and policy rates are in a state of flux as some policyholders may see their rates go down while most will see their premiums increase, with the maximum total increase being $12,000. To learn more about Risk Rating 2.0 and the retirement of PRP’s, see here.
PRP policyholders also used to receive another small benefit in the form of a lower federal policy fee than standard-rated policies. The federal policy fee is a flat charge you need to pay each year or every time you renew your NFIP policy to cover administrative expenses for the agency.
PRP policies had a federal policy fee of $25, while most standard policies have a $50 federal policy fee. Under Risk Rating 2.0, The FPF will be $47 for all new NFIP policies and renewal policies.
An Alternative to Preferred Risk Policies
Flood insurance from the NFIP is by no means perfect. The hard limits on building and contents coverage may not be sufficient to cover your property. For instance, let’s say your home’s replacement cost is $400,000. If it needs to be completely rebuilt after a flood, an NFIP policy can only usually cover you for a maximum of $250,000. Additionally, other structures on your property may not be covered at all.
As technology improves and people want other flood insurance options, private flood insurers are growing in popularity and ability. Private flood insurers can be more flexible in their coverage offerings since they’re not affected by government processes. They can also sometimes offer more affordable policies in certain areas since private insurers have different ways of measuring risk.
If you’re in the market for new flood insurance, especially if your premium has gone up due to Risk Rating 2.0, we’d be happy to help. Clovered exists to make insurance simpler. You can quickly submit a flood insurance quote online, and one of our licensed and experienced agents will reach out to you soon.
We partner with many of the nation’s top private flood insurance providers, so your chances of finding the coverage you need at the price you want are high. And we want to make that happen.
Do you want to pay for costly and common flood damage yourself or have an insurance policy pick up the tab?
The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.