Flooding on the Fox: Flood insurance in McHenry County and across the nation is undergoing a big change. Here’s why.

This story is part of a Northwest Herald series about how local, state and federal officials are trying to mitigate flooding in the Fox River watershed and how northern Illinois residents have been and could be affected by past and future flooding and stormwater policies.

This series is being made available to our readers for free. Please consider subscribing to help us continue the work we do on behalf of the community.

This project was made possible, in part, through a grant from the Fund for Investigative Journalism.

---

Everything about flood insurance could be about to change.

The Federal Emergency Management Agency is in the process of implementing a new method for rating flood risk for the first time since the 1970s, a project known as Risk Rating 2.0.

It involves the federal agency reevaluating premium costs for National Flood Insurance Program plans in an attempt to make policies easier to understand and more reflective of the unique risks presented to individual properties.

Todd Lowenheim, a McHenry-based insurance agent who has sold policies to protect against flooding on properties that were required to have insurance, as well as some that were not, said he thinks existing policyholders locally will face higher premiums as a result of the FEMA overhaul, which is set to take effect later this year.

Right now, the way FEMA rates individual flood insurance policies does not always reflect topographical features that affect flood risk, according to a January Congressional Research Service document.

It calculates expected losses for groups of structures with similar flood risk and structural aspects, assigning the same rate to all policies within a group, the service said.

As an example, two properties would be charged the same rate if they’re both one-story, single-family dwellings with no basement in the same flood zone and elevated the same number of feet above the base flood elevation.

The prices remain the same for each property even if they are located in different states with differing flood histories or rest on different topography, such as a shallow flood plain as opposed to a steep river valley.

“In addition, two properties in the same flood zone are charged the same rate, regardless of their location within the zone,” the Congressional Research Service said, adding that the way FEMA rates flood risk hasn’t fundamentally shifted since the 1970s.

The system has resulted in many policyholders with lower-value homes paying more than they should and policyholders with higher-value homes paying less than they should, FEMA said in a news release this month.

Lowenheim said he would prefer to see FEMA’s flood plains expanded so that more property owners with at least some flooding risk pay into the NFIP rather than the agency increasing prices on existing policyholders to make up for any unaccounted risk under the current program structure.

“I’m a consumer just like everyone else,” said Lowenheim, who owns a property along the Fox River. “I pay for my insurance just like everyone else. I look at it from both sides – not just FEMA but all insurance companies need to rate the risk properly by collecting the appropriate premium. Otherwise they lose money.”

The new technique for assigning flood insurance premiums will start to take effect in October, with the second phase of its implementation set for April 2022.

The approach is meant to allow a more individualized assessment of each property that considers more factors than the previous process used by the NFIP.

Under the current methodology, all program policyholders have been subject to premium increases every year, with annual premium rate jumps averaging 10% from October 2018 to January 2021, said David Maurstad, senior executive of FEMA’s NFIP.

The federal insurance program owed $20.5 billion in debt to the U.S. Department of Treasury as of December 2019, according to the American Academy of Actuaries, a Washington, D.C.-based professional association. The funds were used to pay off insurance claims from catastrophic storms and floods over the past decade.

Insurance premiums paid by property owners in flood-prone areas are not expected to be enough to both cover future insurance claims and the debt, the academy reported in June.

But FEMA officials on a call with reporters this month insisted premiums would not need to rise by severalfold to meet the program’s obligations, as suggested by studies such as the nonprofit First Street Foundation’s, published in February.

Instead, federal analysis shows 23% of policyholders will see premium decreases averaging $86 a month, while 66% of the policyholders will see increases averaging between $0 and $10 a month. Another 7% are set to see increases averaging between $10 and $20, while 4% will see premiums rise by an average of more than $20 a month, the officials told reporters.

For property owners set to see increases, the rule preventing flood insurance premiums from rising more than 18% year-over-year will remain in place, officials said. That means some policies will be adjusted in steps over several years.

As a result, the program will see drops in revenue for the first three years, officials estimated, and it could be 10 to 15 years, without adjusting for inflation, before some properties realize their full premiums under Risk Rating 2.0.

“We do see this as a net benefit to the financial stability of the program,” Andy Neal, an actuary for FEMA, told reporters. “It’s a first step toward helping develop a sound financial framework for the NFIP.”