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What Is a Preferred Risk Policy from FEMA?

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  • 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, offers discounted policies for people outside of high-risk flood zones, also known as special flood hazard areas. 

These discounted policies are called preferred risk policies, and FEMA offers them because they ultimately don’t want to rely on grants and disaster relief like so many uninsured must do after a major catastrophe.

What Is an NFIP Preferred Risk Policy (PRP)?

A preferred risk flood insurance policy from the NFIP has the same coverage as a standard flood insurance policy at a more affordable rate. PRP policies are only available to property owners in low-to moderate-risk flood zones. 

For residential properties, both standard-rated and preferred risk policies offer up to $250,000 of building coverage and $100,000 of contents coverage. But, PRPs offer protection at a lower rate.

Basically, preferred risk policies are a way for the NFIP to encourage those outside high-risk flood zones, where flood insurance is required, to buy flood insurance. It’s 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.

PRP Requirements

To be eligible for a PRP, you’d need to satisfy a few criteria (learn more about preferred risk policies from the National Flood Insurance Program to see how affordable flood protection can be yours):

  1. Your home needs 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 can’t get a PRP.
  2. 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.

If you learn that your home has been rezoned from a special flood hazard area to a lower risk zone, you can convert your standard rate policy to a preferred risk policy without creating a gap in coverage. Get in touch with your flood insurance provider to get started on this process. You’ll need to fill out some documents and applications, such as a FEMA letter of map amendment. You also might need an updated elevation certificate.

When you convert your standard policy to a PRP, you should receive a refund for the difference in policy costs.  The standard policy’s premium is used to cover the lower PRP premium, and you then receive a refund of whatever is left over after your PRP premium is paid.

The normal deductible for a PRP is $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 is $1,250. A contents-only preferred risk policy will have a $1,000 deductible. 

This is 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.

While it’s frustrating that rates are going up, PRP rates are still steadily less than standard-rated policies. 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.

In addition to overall discounted rates, PRP policyholders also receive another small benefit in 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 have a federal policy fee of $25, while most standard policies have a $50 federal policy fee.

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, 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. 

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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.