B - IBC Flood

Question 1

IBC FLOOD

3 reasons why overland flooding has historically not been available in Canada
(ie)
3 specific reasons for non-coverage of overland flooding

Answer 1

1) adverse selection, (would be too expensive if offered)
2) gov’t under-invests in risk planning and mitigation
3) lacks of effective flood hazard maps

Question 2

IBC FLOOD

4 pre-conditions essential to establish a strong flood risk management culture

Answer 2

1) UP-TO-DATE FLOOD HAZARD MAPS for planning and risk mgmt
2) INVEST IN INFRASTRUCTURE (sewers, levies)
3) POLICYHOLDERS AWARENESS OF RISK, mitigation methods, and financial management of floods
4) LIMIT USE OF TAXES to compensate after disaster (individuals should have risk-mitigation incentives and taxpayers should have minimized burden)

Question 3

IBC FLOOD

4 trends making the financial management of flood risk increasingly problematic

Answer 3

1) growth in population and asset values
2) concentration of urban development in flood-prone areas
3) increase in violent weather patterns
4) increase in vulnerability of infrastructures due to under-investment in risk mitigation.

Question 4

IBC FLOOD

5 types of flood based on CAUSES

Answer 4

1) SPRING SNOW-MELT RUNOFF
melting of accumulated snow
2) STORM RAINFALL
extreme rainfall causing extreme storm-water runoff
3) TIDAL FLOODING
low-pressure weather systems and high tide raising water levels
4) NATURAL DAM FAILURE
sudden release of water due to failure of a natural dam (cause by ice jams, landslides)
5) STRUCTURAL FAILURE
failure of man-made flood defences (dams, dikes and levees)

Question 5

IBC FLOOD

3 types of flood based on LOCATIONS

Answer 5

1) FLUVIAL (riverine) flooding
2) URBAN (pluvial) flooding
3) COASTAL flooding (flood surge)

Question 6

IBC FLOOD

Describe the offering of water-related risk in Canada

Answer 6

Overland Flooding : covered through auto and commercial property policies, not yet available for residential.

End’t for SBU damages are available (in Qc, this end’t also include seepage and rising of the water table)

Question 7

IBC FLOOD

2 reasons why insurers often end up paying for a significant portion of flood losses

Answer 7

1) 2 different perils (one included -SBU-, one excluded -overland flooding-) caused the loss and its difficult to determine how much results from one or the other.
2) to avoid reputational damage and political pressures.

Question 8

IBC FLOOD

Arithmetic example showing why flood insurance premium is expensive

Explain.

Answer 8

Property Value = 500K
1-in-50 year flood frequency = 2%
avg severity = 25% of property value = 125K
——-
avg LC = 2% * 125K = 2500$
——-
Owner would have to pay 2500$ at a minimum (not including expenses or profit) for the base flood coverage
——-
When flood occurs, all properties are affected at the same time, reducing the diversification benefit that could have led to reduction in premium

Question 9

IBC FLOOD

GERMANY Flood Insurance program

Answer 9

Private

Voluntary purchase

Optional end’t, take-up rate of 30%

Financial impact to policyholders

Risk-Based Pricing

Gov’t action to forbid floodplain development in risk zones and to create flood maps

Question 10

IBC FLOOD

ITALY Flood Insurance Program

Answer 10

Private

Voluntary purchase

Financial impact to taxpayers

Optional end’t (bundled w EQ coverage)

low insurance take-up (LT 35%) due to belief that its govt responsibility to compensate losses due to natural disaster

Flood take up rate even lower, LT 10%

Risk-based pricing

Question 11

IBC FLOOD

RUSSIA Flood Insurance Program

Answer 11

Private

Voluntary purchase

Optional end’t

take-up rate LT 5%

Risk-based Pricing

Question 12

IBC FLOOD

JAPAN Flood Insurance Program

Answer 12

Private

As part of home policy (with significant co-insurance)

yet Voluntary

40% take-up rate

Risk-based pricing

financial impact to policyholders

gov’t invested largely in risk mitigation measures to bring flood risk under control.

Question 13

IBC FLOOD

UK Flood Insurance Program

Answer 13

Private

As part of Home Policy

virtually mandatory

95% take-up rate

Risk-based Pricing

Financial impact to policyholder

Both insurer and gov’t have clear role to play

• Gov’t : flood mapping, infrastructure, and zoning
• Consumers: Risk-Based Premium and risk mitigation measures to maintain insurability

Question 14

IBC FLOOD

2 reasons why UK flood insurance program is unsustainable and need review.

Answer 14

1) existing insurers were required to retain high-risk properties while not required for new entrants.
2) govt under invested in mitigation

Question 15

IBC FLOOD

Discuss Insurers and Govt NEW AGREEMENT about Flood Risk Insurance in UK

Answer 15

Creation of FLOOD RE

RSP financed by insurers as a non-for-profit fund to subsidize high-risk properties

levy charged to all other policyholders
always operates at a loss

• to ensure availability/affordability to high-risk properties
• to help the transition to risk-based pricing

Gov’t roles are:

• setting price ceiling for flood coverage
• responsible for extraordinary cat losses
• investing in new flood defences

Question 16

IBC FLOOD

Which High-Risk Properties is eligible to Flood Re, in U.K

Answer 16

Properties in high-risk areas, excluding homes built after 2009, to avoid encouraging building in those areas.

Question 17

IBC FLOOD

US Flood Insurance Program

Answer 17

Public

Optional End’t

Voluntary

20-30% take-up rate

gov’t set pricing (based on Flood Insurance Rate Maps (FIRMs)

federal program - NFIP (National Flood Insurance Program)

Homeowners can buy coverage only if living in SFHA (Special Flood Hazard Areas)

NFIP system cannot be financially sound by design.

financial impact to taxpayers

Question 18

IBC FLOOD

FRANCE Flood Insurance Program

Answer 18

Public

Mandatory bundle with other CATs (CAT NAT)

100% take-up rate

Gov’t set pricing (uniform rate across country)

both national and local gov’t must declare state of emergency for a claim to be eligible to CAT NAT

Financial impact on taxpayers

Question 19

IBC FLOOD

3 Main disadvantages of the FRANCE Flood insurance Program

Answer 19

Premium NOT RISK-BASED, removing incentive for risk mitigation from individuals and local govt

low-risk consumers SUBSIDIZE those at higher risk

More a WELFARE program than an insurance program

Question 20

IBC FLOOD

Main reason for failure of many of the international flood models

Answer 20

ADVERSE SELECTION

risk-based premium not affordable since only high-risk wants to purchase it.

Question 21

IBC FLOOD

Advantage and disadvantage of bundling flood risks with other perils

Answer 21

A : Adverse selection is greatly reduced

D : forces low-risk consumers to subsidize high-risk ones

Question 22

IBC FLOOD

3 roles of government for Flood Insurance

Answer 22

1) invest in infrastructure, zoning, floodplain development regulation, up-to-date flood maps for land-use planning
2) increase public education
3) address the issue of high-risk properties

Question 23

IBC FLOOD

4 examples of gov’t under-investment in risk planning

Answer 23

BUILDING codes (obsolete)
ASSETS mgmt (poor)
INFRASTRUCTURE (lack of)
LAND-USE PLANNING (inadequate)