By Natasha Lasky, ODP Staff Writer

Currently, the Federal Emergency Management Agency (FEMA) provides $1.3 trillion in coverage for more than 5 million policyholders in 23,500 communities nationwide through the National Flood Insurance Program. But on October 1, the program will be overhauled to price each property’s unique flood risk while taking climate change into account–the most substantive change to the program since 1968.

As it stands, a property’s elevation and whether it has a 1% annual chance of flooding factor into the flood insurance risk rating.

• In the new model, FEMA will consider the property’s replacement cost, the type of risk (rainfall, river, or coastal flooding), and the distance between the property and a potential source of flooding.
• In addition, FEMA will also consider catastrophic modeling from climate change, particularly sea-level rise, droughts, and wildfires. 

Why This Matters: During Hurricane Harvey in Houston, more than 200,000 homes were damaged or destroyed, three-quarters of them without flood insurance, as many were outside FEMA flood zones, which are updated only every five years. The overhaul in the flood insurance program will also make flood insurance policies more equitable for homeowners. 

As David Maurstad, Senior Executive of the National Flood Insurance Program told CNBC:

“What we found out was that many folks with lower-value homes were paying more than they should, and those that had higher-value homes were paying less than they should. And we have a responsibility to make sure that we have actuarily sound, fair, and equitable rates. And so that’s what’s driving the change.”

Fixing Flood Insurance: Significant parts of the FEMA overhaul include making flood insurance more financially stable and adjusting rates to make them more accurate and more equitable. FEMA has piloted a means-tested affordability program that will help low-income residents pay for increasingly necessary flood insurance. Meanwhile, most homeowners will see rates go up about 10%, the standard annual increase.

These changes will also make FEMA more fiscally stable. Currently, as storm damage increases, FEMA is paying billions of dollars to support uninsured homeowners.

“No question, we need to close the insurance gap. Not enough people in the high-risk area have the coverage they need to be able to be on the path to recovery after a flood event,” Maurstad told CNBC, “There’s just too much disaster, suffering, going on that we can minimize if we are able to have more people have the coverage they need.”

Learn More: Watch our interview with Carolyn Kousky, the Executive Director at the Wharton Risk Management Center at the University of Pennsylvania, about FEMA’s plans to modernize the way it sets rates.

Fixing Private Insurance: Historically, the private insurance industry has had relatively good modeling for “primary perils” like earthquakes and hurricanes but has had difficulty with “secondary perils” like snowstorms, drought, flooding, and wildfires, since these phenomena can be so erratic. As such, insurers are struggling to make accurate risk assessments for the insurance products they sell.

Compounding the issue is that extreme weather events have only grown more common, and their effects will continue to worsen, according to the recently released Intergovernmental Panel on Climate Change (IPCC) report.