Solutions

A Flood of Change Comes with FEMA’s Risk Rating 2.0

A Conversation with Scott Giberson

In April, the Federal Emergency Management Agency will be updating its flood insurance risk grading systems. After decades of using the same system to understand the flood risk for properties in and around flood zones, these changes will be far-reaching, and the results of this shift will be numerous.

In this episode, host Maiclaire Bolton Smith sits down with Scott Giberson, principle of flood compliance at CoreLogic, to discuss the implications of this migration to Risk Rating 2.0.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast, where we dive into the heart of what makes the property market tick. I’m Maiclaire Bolton Smith, your host and curious observer of all things related to property — from affordable housing to market trends and the impacts of natural disasters to climate change — I want to converse about it all.

So, we’re back. It’s 2022, and we’re thrilled to be back with Season Two of Core Conversations. And today, we’re going to be inspecting another angle of the infinitely complex and infinitely interesting property market.

So, to kick off the new season, I want to dive in and look at the effects, both on insurance and homeowners, of the implementation of FEMA’s (the Federal Emergency Management Agency’s) new flood insurance update. Known as Risk Rating 2.0, the government agency began incorporating this property-specific flood rating into the National Flood Insurance Program (NFIP) in October of 2021. Prior to this update, FEMA had used decades-old systems of understanding the flood risk on individual properties within a flood insurance rating system.

Such a change will have far-reaching implications for not only insurers but also program stakeholders as well as banks and mortgage companies. So, to dive into this topic today, we have with us Scott Giberson, principle of flood compliance on the CoreLogic flood services team. Scott, welcome to Core Conversations!

Scott Giberson:

Thank you, Maiclaire. You don’t know how long I’ve been waiting for this invitation. So I really appreciate the opportunity to be here today.

MBS:

Well, yeah, we’ve been talking about having you on the podcast for so long. So I am thrilled that we get to chat about this today. So, before we get into things, can you tell our listeners a little bit about your background and your role here at CoreLogic.

SG:

Happy to. Well, I was on a plane earlier this week, flying back from a conference, and a lady next to me asked me what I do. So, I told her, well, I’d likely helped her to buy every home she has ever purchased without her even knowing. What I mean by that is within each mortgage loan document there is a single line, it says, “flood determination fee.” And that’s where we come in at CoreLogic Flood Services. We tell the bank whether flood insurance is required on the mortgage, based on the flood zone the home or business is in.

SG:

And my job as a compliance principle is to help ensure that our products and services satisfy the bank’s requirements. Because of course, the banks have to stay in line with the laws. So, beyond that, I also work on advocacy because we want to ensure that the nation is governed by sound policy related to flooding, flood insurance, and flood maps. So, I’m often out and about working on broader industry issues. Currently, I serve on the board of the National Flood Association. I’m also a member of the Technical Mapping Advisory Council that provides guidance to FEMA on its flood mapping program. And, most importantly, Maiclaire, I am a grandpa of two amazing granddaughters. I know you are a new mom, Maiclaire. Congratulations.

MBS:

Thank you.

SG:

I’ll just say to be sure to stick around for the next generation, it gets even better!

MBS:

Fantastic. Well with that kind of background, Scott, it’s exactly the reason why we want to talk to you today about this exact topic. And flood risk and assessing flood risk has inevitably come up in many of our podcasts before, but I’m just glad that we’re going to dive into this topic in particular.

MBS:

So, before we get into it too deeply, let’s start out with a little background about floods and why the federal government needed to update its flood assessment. How does this new methodology diverge from the original risk rating that FEMA has used for decades?

SG:

Well, great question, Maiclaire. And there’s been a number of analogies that I’ve heard over the last year, comparing the legacy system based on flood zones to the new risk rating system. And one analogy I like of those is it’s like going from watching the analog TV — remember the old box TV with rabbit ears?

MBS:

Oh, yeah.

SG:

And compare that to watching a digital cable TV on smart TV today. And that analogy isn’t really intended to be critical of the legacy system because, as you know, in our business FEMA’s flood maps continue to play a critical role.

MBS:

Yeah.

SG:

In terms of supporting the lenders with the mandatory purchase requirements, but also in terms of supporting communities across the nation with floodplain management. So again, FEMA’s flood maps continue to be important, critical for the country. This is an important point. But back to your question, strictly for insurance purposes; however, just as with the digital TV today, Risk Rating 2.0 takes advantage of today’s data and technology to provide a more complete picture of flood risk for the entire spectrum from the very risky to the very low-risk areas.

SG:

So, it’s not just relying on the three good channels that you used to find using your knob on the box television. So, Risk Rating 2.0 is looking at numerous variables related to the building and the property’s flood risk, and not the flood zone itself. And if I can, Maiclaire, answer your question…

MBS:

Yeah.

SG:

…you ask, “Why is FEMA doing this now?” I was asked this question in a recent conference and the answer is layered. One layer of the answer is similar to the answer as to why did television manufacturers, cable companies and broadcasters change from supporting analog programming and products to now digital signals. So now to the point where we are now with FCC requiring televisions be built with the digital cue. The answer is technology and progress. And if you think about it from that perspective, the 1990s, the digital revolution began and quickly spread across much of the world.

SG:

For flood insurance purposes FEMA had been relying upon the same technology for 50 years. And of course, technology and progress would not permit that to go on forever. So with so much available data, and with the ability of supercomputers to process that data, the private industry was able to create these reliable flood catastrophe models, such as CoreLogic’s Flood Catastrophe Model, which as, you know, supports the private insurance industry, storm surge and flash floods. So again, thinking back to the “why,” it’s because technology and data now make it possible for FEMA to take that next step into this more sophisticated rating system.

MBS:

I love that analogy, Scott. And that makes a lot of sense because something worked before and it was fine, but it can always get better. And technology is advancing all around us in so many different ways. And previously we’ve talked about innovation and different things in the industry that are really moving the industry forward. So, I do love that FEMA is really trying to get the best assessment as possible. I know there’ve been a number of events, Hurricane Harvey stands out, with so many people, that people were underinsured from flood because they weren’t in a FEMA designated flood zone because it was kind of viewed as you’re either in a flood zone or out of a flood zone. And this is a way of refining that a little bit better to have a better assessment so people are more protected.

SG:

You’re right. This is another layer of reasoning as to why now. And that’s the pressure that FEMA’s been under. You mentioned Hurricane Harvey and we’re seeing more and more uninsured flood losses, increasing in numbers and severity outside of the high-risk area. And this has really been pressure mounting since Hurricane Katrina. So, it’s not only the uninsured, outside of the high-risk area, but it’s also the debt that the program faced and the pressure from policymakers that the program was not sustainable based on the legacy rating methodology. So, in addition to technology, it was policy and pressures on FEMA that really led it down this path.

MBS:

Right. So, let’s dive a little bit more into that technology, I guess. In your view, what are the major things that have changed with the NFIP that both borrowers and lenders will now experience? Are there new variables that they’ve incorporated that are new? What’s changed?

SG:

So importantly, Risk Grading 2.0 has primarily a direct impact on the insurance industry and insurance professionals that support the NFIP. So, in estimates, the NFIP says they’ve trained about 35,000 agents across the country just in the last year. So from an insurance perspective, this is huge. And I will say in my opinion, the insurance industry has done a fantastic job in responding — both from a company perspective and an agent perspective — they’ve done a lot of work. So keeping in mind, it’s really about a change to the way an insurance policy is graded. It doesn’t have as much of a direct impact on the mortgage industry, but let’s talk about how it does impact the mortgage industry. It’s less dramatic, not as obvious, but there are changes.

SG:

So, in a recent poll of lender flood clients that was conducted by CoreLogic (and keep in mind, these are lender flood clients. So these are people familiar with flood insurance matters) only about 10% responded that they have little or no knowledge of Risk Rating 2.0. And then the same poll of lender clients about 65% responded that they have seen little or no impact on the loan origination since Oct. 1, which is when the new policies began to be issued. And only about 20% said they felt unprepared for handling renewals on or after April 1.

SG:

So, all of this supports the point that lender requirements are largely unaffected…

MBS:

Okay.

SG:

…by Risk Rating 2.0. And this is a point I’ll emphasize is that Risk Rating 2.0, has no effect on the mandatory purchase requirements nor on flood determination that we provide nor on life of loan monitoring. All of this remained the same.

MBS:

That’s important. Yeah.

SG:

It is. And so one thing I want to refer folks to on FEMAs website. So, it’s FEMA.gov/NFIPtransformation all run together, NFIP transformation. If you go there, folks can look for the “What’s Changing and What’s Not Changing Table.” It’s a nice summary at a glance you can kind of see, okay, what is changing and what’s not changing with respect to the NFIP.

SG:

And so in addition to that table, I do have some practical advice, if I may, for lenders, banks and mortgage servicers, and one is around the premium change, of course, that’s the big question. Who’s changing? How much? What’s the decrease? What’s the increase? Which of my customers are going to see long-term affordability concerns? So, one thing to keep in mind with the changes on renewals, is the increases for primary residences will be capped at 18% per year…

MBS:

Ah, okay.

SG:

…but that does not apply to second homes nor investment properties nor does it apply to commercial buildings.

MBS:

Okay.

SG:

So, when the servicer sees… When they understand changes are coming, they’re probably thinking terms of escrow impact, right? They’re going to have to adjust escrow amounts either to pay more for flood insurance or to pay less for flood insurance.

MBS:

OK.

SG:

But given that NFIP policies, historically, have changed year over year, just not in the same way, but there have been changes. This should not be new territory for services so they should be comfortable…

MBS:

Okay.

SG:

…But just be aware that changes in escrow are coming.

MBS:

Okay.

SG:

What they need to also prepare for are questions. Their frontline call agents are going to get questions from borrowers.

MBS:

Okay.

SG:

Now what we suggest, and the NFIP supports this, is that servicers and lenders are not in a position to answer questions about why a policy is going to increase or decrease. Those need to be directed to the agent.

MBS:

Okay.

SG:

And that’s what NFIP suggests. Direct those borrowers to their insurance agent to have those conversations about premiums changing.

MBS:

Okay. What kind of questions do you anticipate that might come or the questions that people should be asking?

SG:

So, in addition to questions about why the change, right? And what am I going to do about it? There may be some questions about why my neighbor is experiencing something different than I am? Another question might be: Why my preferred risk policy is going away? And that’s something I want call attention to is that this low-risk, flood insurance product that the NFIP has supported for 30 years, Preferred Risk Policy or PRP as people commonly call it, that is no longer an option. And so…

MBS:

Got it. Okay.

SG:

…So now servicers should look at their call scripts because in those call scripts they may have reference to the Preferred Risk Policy. They may even direct a borrower to go to FEMA, to apply for a Letter of Map Amendment for the express purpose of retaining a Preferred Risk Policy.

MBS:

Okay.

SG:

They just need to look at that and be sure that their call scripts for their frontline agents are updated. That, yes, you can still obtain a Letter of Map Amendment from FEMA, but it’s not for the purpose of obtaining a Preferred Risk Policy.

MBS:

Okay. Interesting. That’s super helpful, and I’m glad we got into that. So the next thing I wanted to talk about, you mentioned a couple of dates there, and we did mention earlier that this risk rating framework was officially unveiled in October of last year. But policies that are affected without the option of being grandfathered into some legacy rating plans will be those that are renewing in April, and that’s not very far away. Some lawmakers have pushed FEMA to delay that rollout of the new system fearing that the premium increases for homeowners will not be great. What do you think about all of this?

SG:

Well, you’re right. That existing policies that have been renewing for years within the legacy system will be moving over to Risk Rating 2.0, beginning as of April 1 and over the next 12 months. And you’re also right, that this has caused concern in Congress and in various states, particularly in coastal regions, about the impact in terms of affordability for families, as well as for… if you think about small business owners and possible [crosstalk].

MBS:

Sure. Yeah.

SG:

So, I’m sensitive to this. And I know importantly that FEMA officials in conversations I’ve had with them, they’re of course, very aware and very sensitive to this as well. So what FEMA highlights is important that in 2018, FEMA released an affordability framework at the direction of Congress, by the way, Congress directed them to do this.

MBS:

Okay.

SG:

And they released it and it includes several options for how to assist those facing challenges with the cost of flood insurance.

MBS:

Okay.

SG:

So importantly, I think those options need to be considered, which again, I will refer people to the Affordability Framework by FEMA, but keep in mind that there is the current cap of 18% that I mentioned earlier. So, it’s not as though, on renewals, that you’re going to have policyholders that all of a sudden see a 5,000% increase in their premium. That’s not the reality for what they do.

MBS:

Okay.

SG:

It is going to be capped at 18%. However, when that policyholder receives their declarations page, they will have a line of sight into that full risk premium as it’s called on the declarations page.

MBS:

Okay.

SG:

So, they will see long-term what they’re ultimately going to face in terms of a premium. And that of course may drive concerns about long-term viability in that home or in that [crosstalk].

MBS:

Sure, sure. Well, when we think about long-term, another thing that comes to mind is climate change. Climate change is all around us, it’s everywhere. And I think in addition to increasing premiums, this plan has been criticized, by some, on failing to address for climate change in the future. So, How do you interpret this from some of these groups that are saying this? What are your thoughts on that?

SG:

Well, that’s an important question, Maiclaire. And this is probably an appropriate time to take a quick step back with respect to FEMA’s flood program because it’s more than flood insurance. So, people describe FEMA’s flood program for the nation as a four-legged stool…

MBS:

Okay.

SG:

…Four-legs being flood insurance, flood management, flood mapping and mitigation.

MBS:

Okay.

SG:

So, the idea is that it requires all four legs of a stool to lead to a more flood-resilient nation. So the question may be, “Will climate change sink the stool?” No matter how strong the legs are, is climate change going to put it underwater?

MBS:

Right.

SG:

So, an important thing is that FEMA is considering climate change, now, and the impacts on all aspects to the program. So, for example, there was a recent public comment period that closed on a request for information, that FEMA opened late last year, to gather information on how to prepare the nation to be more resilient, including based on the impacts of climate change. And one of the questions FEMA asked was, “Should FEMA include projections of climate change impacts, including sea level rise, on its floodplain management standards for the nation?”

MBS:

Okay.

SG:

So, to me, this obviously says FEMA’s working at it.

MBS:

Yeah.

SG:

And CoreLogic, for our part, we did respond to that RFI — the request for information —and then we did respond to this direct question on climate change’s impacts. So I encourage folks to go to regulations.gov and you can read the CoreLogic response because it’s public information. Because in there we provide some results of our own analysis of the future impact of flooding based on projections from the Intergovernmental Panel on Climate Change.

MBS:

Perfect. Thank you for sharing that, that’s great because the IPCC — again the Intergovernmental Panel on Climate Change — really is one of those bodies that does regulate a lot of information that’s out there so I’m glad that we were able to contribute to that. If we look at insurance for flooding, this is something that’s really evolved over the last couple of years. I mean, a decade ago, probably even less than that, FEMA was the only option. The NFIP —the National Flood Insurance Program — was the only option, but in the last few years — and really, I think it’s since Hurricane Harvey, maybe some of the other hurricanes —but when we’ve seen this very bad flooding, we’ve seen this uptake in private flood insurance. Is there an option to select private flood insurance or is… I mean, NFIP is not the only option anymore.

SG:

You’re right. This topic comes up a lot in my conversations with banks and mortgage companies. And your memory is good on the timing of this. The short answer is, yes, that borrowers have more options today than they ever have had in the past. And the reasons go back to technology and progress as I described earlier. 50 years ago, the private industry did not have confidence in that it could insure against the [paramount 00:19:56] flood. But because of data and technology, and I mentioned CoreLogic flood catastrophe models earlier. The insurance industry is now at a point of viewing this as viable and profitable. And so since 2019, the federal regulations governing banks and other lending institutions explicitly provide for a lender’s ability to rely on a private flood insurance policy to satisfy the…

MBS:

Perfect.

SG:

…federal flood insurance requirements. So, in those, I mentioned recent discussions with lenders, the expectation is that, due to Risk Rating 2.0, we will likely see an increase in borrowers shopping around to compare prices in the private market…

MBS:

Yeah.

SG:

…against the NFIP under Risk Rating 2.0. Thus, my suggestion for lenders and servicers is to ensure your teams and your vendors are ready to review those private flood checklists that you created back in 2019.

MBS:

Right. And really an opportunity for those in the insurance space…that business opportunity for them. That this could be an option now that it is available. Advantages of selecting private flood, insurances? Disadvantages versus the NFIP?

SG:

Yeah, I’d say the most important thing today is for folks to comparison shop. So, it’s kind of like shopping for auto insurance, but it’s important. It’s not just about price. So, this is a key thing with respect to comparison shopping for flood insurance is it goes beyond merely comparing the price, and a consumer will definitely want to compare the products in addition to the price.

SG:

So, folks may not be aware that there is a federally prescribed disclosure that is given to borrowers who are going close a mortgage on a home in a high-risk flood zone. And as of 2015, this disclosure includes a directive to the borrowers to compare the flood insurance coverage, deductible, exclusions, conditions and premiums associated with both NFIP and private, and to discuss those differences with an insurance agent.

SG:

So, as an example, just yesterday, I received a call from a credit union representative, and she asked me why the NFIP policy did not include additional living expenses —something you would think is common in a private hazard policy. So, the reason that she was asking is one of her members was displaced from their home for several weeks due to flood. And I explained to keep in mind that NFIP is a federally backed policy…

MBS:

Yeah.

SG:

…federally backed program, so if it contained costs, that would ultimately have to be passed on to the taxpayers, Congress intentionally limits the coverage and did not include all the bells and whistles that the private community might offer.

MBS:

Sure. Yeah. Okay.

SG:

So a further example on that is the $250,000 limit you’re probably familiar with.

MBS:

Yeah.

SG:

For a residential home under NFIP you can’t buy more than two $250,000 and that’s been in place since ’94. So certainly, you want to compare. You want to compare everything from the coverages, from the limits to the exclusions and the premiums. And FEMA and Congress are sensitive to this and so they are looking at ways to perhaps modernize the NFIP policy.

MBS:

Okay.

SG:

But in the meantime, yes, take advantage: look out there, shop, talk to insurance agents and brokers and see what’s best for your home and your business.

MBS:

Yeah. Shop around that’s the key message there. So, okay, just to wrap up today, Scott, resilience is one of my favorite words, and here at CoreLogic, our little tag phrase is, “Know your risk to help accelerate your recovery.” And we are all about awareness. I mean, one of my biggest passions as a hazard scientist and background in my life is awareness and raising risk awareness. I would hope that these changes and the more availability of flood insurance now would help raise the awareness of flood risk and the importance of having flood insurance. What do you think about this? How would such a shift be so important to the mortgage industry at large? Are there opportunities to become a more flood resilient nation? Do we think that this is going to be enough to really spark people to try and start to get flood insurance? Or dare I say it, do we need another really bad event where people are heavily uninsured to raise awareness? To make them realize that they need flood insurance? What do you think? Is this going to be enough to get people to take action?

SG:

Well, I share your hope. As I think about Risk Rating 2.0 as time goes forward, I do see Risk Rating 2.0 as breaking down some of the walls…

MBS:

That’s great.

SG:

…some of the misconceptions about flood risk. And that as those walls come down, that more property owners and business owners choose to purchase flood insurance, whether or not really their bank requires it or doesn’t. As you know, Maiclaire, I’m a strong supporter of federal mandatory purchase of flood insurance guidelines with banks. And apparently, I’m not alone. There was a recent Fannie Mae survey, and, as a result of that, one finding was about two-thirds of the respondents agreed that there should be a flood insurance requirement for properties in a high-risk flood zone. But I stress that this is a minimum requirement. So as with any minimum requirement, it’s really a safety net for banks, investors, borrowers and taxpayers. What we need to do, and what Risk Rating 2.0 is starting to do, is to, again, break down the walls, blur the lines of the flood zones so now lenders can consider data to help them make decisions on mortgages for buildings outside of the high-risk flood zone. Insurance agents can start to have more informed conversations about flood risk across the spectrum of risk. And ultimately, as you point out, homeowners and business owners can make the right decision based on more information to ultimately purchase flood insurance to cover their homes and businesses. All of this is just one part of building a path towards a more flood-resilient nation.

MBS:

Well, that is a fantastic place for us to end today, Scott. So, thank you so much for joining me today on Core Conversations: a CoreLogic Podcast. I’m thrilled that we got to kick off season two with you today, Scott.

SG:

Thanks again.

MBS:

And thank you for listening! I hope you’ve enjoyed our latest episode. Please remember to leave us a review, let us know your thoughts, and subscribe wherever you get your podcasts to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life, producer Jessi Devenyns, editor and sound engineer Romie Aromin and social media by Sara Buck. Tune in next time for another Core Conversation.

© 2022 CoreLogic,Inc., All rights reserved.

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