Flood Flashcards
What are the priority areas for the Emergency Management Strategy (EMS) in Canada?
Collaboration to strengthen resilience
Understanding disaster risks in all sectors
Focusing on disaster prevention and mitigation
Enhancing disaster reponse capacity and development of new capabilities
Strengthening recovery efforts
How can overall flood risk be reduced?
Relocation
Building resilient infrastructure
What are the key drivers of flood risk in Canada?
- Population growth
- Urban development
- Climate change
- Densification and development of urban areas exposed to flood
What are the challenges in making flood insurance available and affordable in high-risk areas?
- High costs of insurance
- Low risk awareness amongst homeowners
- Misaligned incentives that do not encourage risk reduction or insurance purchase
Frequency of flood can be affected by:
Increases in extreme precipitation due to climate change
Severity of flood can be affected by:
Development of floodplains
overall flood risk can be reduced by:
【1】Relocation
【2】Building resilient infrastructure
Pluvial:
when an extreme rainfall event creates a flood independent of an overflowing water body
Fluvial:
when the water level in a river, lake or stream rises and overflows onto the neighboring land
Coastal:
when dry and low-lying land is submerged by seawater
What are the key drivers of flood risk in Canada?
- Population growth
- Urban development
- Climate change
- Densification and development of urban areas exposed to flood
What are the challenges in making flood insurance available and affordable in high-risk areas?
- High costs of insurance
further eroded by
-> High housing costs
-> Recent flood events
-> Reinsurance rates
-> Material changes in risk leading to increased premiums - Low risk awareness amongst homeowners
-> Flood maps are not easily accessible leading to homeowners not purchasing coverage
-> Not buying enough optional flood coverage
-> Not investing in property-level protections - Misaligned incentives that do not encourage risk reduction or insurance purchase
Why is flood insurance cost-prohibitive for low-income households?
- High housing costs
- Recent flood events
- Reinsurance rates
- Material changes in risk leading to increased premiums
Why do most Canadians in high-risk areas lack awareness of their flood risk?
- Flood maps are not easily accessible leading to homeowners not purchasing coverage
- Not buying enough optional flood coverage
- Not investing in property-level protections
What is the impact of misaligned incentives on flood risk management?
Homeowners and local governments have little incentive to reduce risk or purchase insurance..
..and the expectation of government assistance reduces motivation for lower-level stakeholders to take preventive measures
What does the EMS emphasize regarding financial risk sharing for disasters?
The need to develop options for sharing the financial risks of disasters.
What is the traditional approach to flood risk management?
Building structural controls to keep people and property separate from flooding sources.
What is Flood Risk Management (FRM)?
An approach where the responsibility for flood risks is spread across various stakeholders and uses non-structural mitigation methods to complement structural ones.
What are the responsibilities of the Federal Government in flood risk management?
- Coordinating and supporting local efforts
- Providing assistance through the DFAA program
- Offering emergency management services to Indigenous groups
- Regulating and monitoring water resources.
What are the responsibilities of the Provincial Government in flood risk management?
- Setting regulations and policies on land use
- Regulating the insurance sector
- Establishing land use planning standards
- Regulating natural resource development
What are the responsibilities of Indigenous Communities in flood risk management?
- Developing community emergency management plans
- Working on structural mitigation projects with ISC
- Receiving funding from CIRNAC to respond to climate change impacts
What are the responsibilities of the Insurance Industry in flood risk management?
- Transferring flood risk from homeowners to insurers
- Paticipating in data collection
- Incentivizing risk reduction measures
- Helping shift the burden away from government DFA programs
What are the four preconditions needed to enable the private market to function in flood insurance? (Hint: LIAA)
- Limited or restructured post-disaster financial assistance
- Improved public awareness of flood risk
- Accurate and up-to-date flood maps
- Adequate investments in flood defences
What are the responsibilities of Non-governmental and Civil Society Organizations in flood risk management?
- Supporting flood recovery efforts
- Emergency planning
- Public education
- Coordinating volunteers
- Providing on-ground assistance during incidents
What are the responsibilities of communities and individuals in flood risk management?
Seeking information on flood risks and undertaking non-structural and structural risk mitigation efforts, such as:
* purchasing flood insurance
* flood-proofing homes
What is the most effective strategy for reducing flood risk?
Strategic relocation, which involves removing all assets and properties at high risk of repetitive flood damage through government buyouts
What are the challenges associated with strategic relocation?
It is challenging, time-consuming, expensive, and there is an affordable housing shortage in Canada
What type of flood insurance market does Australia have?
- Fully private market with regulation from the government
- Voluntary take-up
- Risk-adjusted premiums
- Low cost to the government
What are the main characteristics of France’s CatNat scheme for flood insurance?
- 12% surcharge on home insurance policies
- Mandatory for mortgages and optional otherwise
- Premiums ceded to a state-owned reinsurer
- Affordable
- Lacks risk differentiation incentives
How does the UK manage flood insurance for high-risk areas?
- Private insurers provide coverage
- Premiums ceded to a high-risk reinsurance pool (Flood Re)
- Affordability prioritized
- Flood Re is Non-profit entity accountable to the government
- Minimal cost to the government.
What is the US’s National Flood Insurance Program (NFIP)?
- Administered by FEMA
- Mandatory for federally backed mortgages in flood-prone areas
- Risk-based premiums
- Community rating system for risk reduction
- Available and affordable
- High cost to the federal government
What are the four guiding themes for Canada when setting up a flood program?
- Uncertainty
- Market penetration; Adverse selection and mutuality
- Affordability
- Moral hazard
What are the policy objectives for flood insurance in Canada?
- Adequate and predictable financial compensation
- Risk-informed price signals and mitigation
- Affordability
- Wide availability
- Maximized participation
- Value for money for governments and taxpayers.
What are the trade-offs between availability and affordability in flood insurance?
Increasing affordability may reduce financial incentives for property-level risk reduction and likely increases government costs.
What are the trade-offs when prioritizing risk-based pricing?
It will affect the number of residents who can participate
What are the trade-offs in balancing affordability and coverage?
Balancing affordability requires trade-offs between adequate coverage and financial burden to the public
What are the trade-offs in focusing on cost-effectiveness for flood insurance?
It may shift the burden to homeowners or municipalities, with the total flood risk cost remaining
(and only reducible through mitigation and prevention)
What are the trade-offs in maximizing participation in flood insurance?
Maximizing participation with mandatory provisions and government funding increases government costs
(needing to balance with closing the protection gap)
What are the four proposed insurance models for Canada?
- Flat cap high-risk pool
- Tiered high-risk pool
- Public insurance
- Public reinsurance (layered)
Assumptions - Current Total Flood Risk
Annual average loss of $2.9 billion in residential flood damage.
The vast majority of risk is concentrated in a small number of the highest risk homes
Assumptions - Lifespan of Model
- Models designed for a lifespan of approximately 25 years
- Analysis based on costs/features in a given operational year
- Transition/wind-down costs not included; criteria for ending the arrangement require further work
Assumptions - Climate Change
- Risk distribution expected to change due to increasing and severe climate events
- Current analysis based on 2020 flood hazard models
- Future climate modeling addressed in a multi-year research project starting in May 2022
Assumptions - Inflation
- Costs provided on a 2020 current dollar basis
- Future projections and inflationary adjustments not considered due to difficulty in prediction
- Inflation expected to impact models similarly, not altering their comparative assessment fundamentally
Model Design Features - High Risk Homeowners Threshold
→ High risk defined as top 10% by Average Annual Loss (AAL), with the highest risk in the top 1%.
→ A price-based threshold is used: premium > 0.1% of coverage ($300 for a $300,000 policy).
→ This threshold aligns with international affordability standards.
→ Approximately 10% of households fall under this category.
Model Design Features - Affordability
→ Measured by the ratio of premiums to household wealth or income.
→ Home value often accounts for 70% of household net worth.
→ Premium caps and subsidies can help make insurance affordable.
→ Premium caps phase out over time.
→ Subsidies decrease as income increases.
Model Design Features - Premium Loading Factors
ROAM
→ Includes administration, overhead, reinsurance, and safety margins.
→ Calculated based on average annual loss (AAL).
→ No profit margin included.
Model Design Features - Cross Subsidization
→ Redistributes premiums to lower high-risk homeowner costs.
→ Low-risk homeowners pay slightly more.
→ A levy of $20-$45 provides $250-$650 million per year.
Model Design Features - Deductibles
→ Initial costs are paid by homeowners.
→ Can be used to reduce moral hazard and incentivize risk reduction.
→ A $5,000 deductible is used for model costing.
→ Higher deductibles can reduce participation.
Model Design Features - Participation
→ Low participation rates reduce financial stability while homeowners have to bear more residual risk.
→ Higher rates needed to spread risk and lower premiums.
→ Current participation is 40-60%, mainly in low/medium risk areas.
→ Participation can increase with public awareness and affordability supports.
Model Design Features - Standardization of Flood Insurance Policies
→ Government involvement increases standardization.
→ Policies may standardize language, perils covered, and bundling of water-related perils.
What is residual risk?
- Financial risk remaining after applying insurance.
- Important for transitioning from public disaster financial assistance (DFA) to an insurance-based system.
Model 1: Flat Cap High-Risk Pool
→ Inclusion: High-risk households (premium > 0.1% of coverage)
→ Flood Premium Cap: $500
→ Income-based Subsidies: None
→ Coverage Cap: $300,000 per event
→ Deductible: $5,000
→ Cross Subsidization: $20 levy on all residential property policies
→ Stabilization: Reinsurance and government backstop
→ Participation Assumptions: Mandatory offer, optional purchase. 80% for low risk, 50% for medium and high risk
→ Premium Loading Factor: 96% of Average Annual Insured Loss
→ Policy Standardization: Standardized policies for high-risk homeowners
Model 2: Tiered High-risk pool
→ Inclusion: High-risk households (premium > 0.1% of coverage)
→ Flood Premium Cap: 5 levels based on reconstruction cost quintiles: $250; $500; $1,000; $2,000; $4,000
→ Income-based Subsidies: None
→ Coverage Cap: $300,000 per event
→ Deductible: $5,000
→ Cross Subsidization: $40 levy on all residential property policies
→ Stabilization: Reinsurance and government backstop
→ Participation Assumptions: Mandatory offer to all; mandatory purchase with mortgage and optional without. 80% for low risk, 65% for medium and high risk
→ Premium Loading Factor: 96% of Average Annual Insured Loss
→ Policy Standardization: Standardized policies; comprehensive bundling of water coverage
Model 3: Public Insurer
→Inclusion:All households (low, medium, and high risk)
→Flood Premium Cap:$3,000
→Income-based Subsidies:Sliding scale based on income, funded by FPT governments
→Coverage Cap:$300,000 per event
→Deductible:$5,000
→Cross Subsidization:$45 levy on all residential property policies
→Stabilization:Reinsurance and government backstop
→Participation Assumptions:Mandatory offer and purchase via bundling with home insurance. 95% for low and medium-risk households, 90% for high-risk households
→Premium Loading Factor:66% of Average Annual Loss, includes annual living expenses
→Policy Standardization:Standardized policies for all with home insurance; comprehensive bundling of water coverage
Model 4: Public Reinsurer
→Inclusion:All households (low, medium, and high risk)
→Flood Premium Cap:None for first layer; $3,000 for second layer
→Income-based Subsidies:None for first layer; sliding scale based on income, funded by FPT governments for second layer
→Coverage Cap:$25,000 for first layer; $300,000 for second layer
→Deductible:$5,000 for first layer; N/A for second layer
→Cross Subsidization:$20 levy on all residential property policies
→Stabilization:Determined by individual insurers’ business model for first layer; reinsurance and government backstop for second layer
→Participation Assumptions:Mandatory offer and voluntary purchase for first layer (80% for low risk, 50% for medium risk, 35% for high-risk households); mandatory offer and purchase via bundling with home insurance for second layer (same participation rate as Public Insurer model)
→Premium Loading Factor:166% of Average Annual Insured Loss for first layer; 66% of Average Annual Loss for second layer
→Policy Standardization:Non-standardized policies for first layer; standardized policies for second layer
What is the role of deductibles in the insurance models?
Initial costs paid by homeowners to reduce moral hazard and incentivize risk reduction
What is the primary focus of the risk reduction efforts in the insurance models?
Targeting the riskiest properties through strategic relocation or other mitigation measures to reduce the annual costs of caps and subsidies
How is inflation expected to impact flood risk models?
Inflation on re/construction costs is typically higher than inflation on common goods and services, impacting future projections
What is the importance of standardizing flood insurance policies?
Standardization increases government involvement, ensures consistent coverage, and reduces coverage disputes
How is the government backstop used in flood insurance models?
It provides stabilization through capital investment and accumulation of reserves..
..reducing the probability of drawing down the backstop over time
How can standardized policy language improve flood insurance?
It simplifies policies and empowers consumers, reducing ambiguity regarding coverage amounts and responsibilities based on the source and cause of flooding
What are the key evaluation points for the Flat Cap High-Risk Pool model regarding adequacy and predictability of compensation?
- Allows consumer choice
- Sandardized coverage
- Optional coverage can lead to inadequacy for some.
How does the Layered Public Reinsurer model perform in terms of adequacy and predictability of compensation?
Strong, with mandatory take-up in Layer 2 ensuring big events are sufficiently covered
(and optional coverage in Layer 1 allowing homeowners to self-insure)
How can individual risk reduction behavior be incentivized?
- Premium price
- Deductible
- Capacity to pay
- Linking premiums to mitigation actions
Which model is strongest in terms of risk reduction and why?
Layered Public Reinsurer, as it:
* balances homeowner and government mitigation incentives
* encourages property-level protection and strategic community/watershed-level risk reduction
What makes defining an affordability threshold complex?
Factors like:
* Ability to pay
* Relative risk
* Income
* Housing costs
* Type of coverage
* Regional differences.
Affordability measured by theratio of premiums to household wealth or income
How does the Public Insurer model address affordability?
Combines a single higher premium cap and means-tested subsidies, balancing affordability while reducing excessive costs for the highest risk properties
Why is ensuring insurance availability important?
It ensures coverage remains available post-flood and addresses gaps in northern, remote, and some Indigenous communities
Which model is weakest in terms of participation and why?
Flat Cap High-Risk Pool, as it relies on optional coverage which leaves substantial residual risk for homeowners
Why is participation key in flood insurance?
to ensure adequate coverage and reduce residual risk
What is the impact of greater public intervention in flood insurance?
It can more fully close protection gaps, but at a cost. Aiming for higher participation rates and increased affordability without significant risk reduction investments
How can relocation serve as a risk reduction tool?
It removes risk and improves insurance viability, though practicality in areas with housing shortages must be considered
Why is community-level engagement important in relocation efforts?
Early engagement with communities and jurisdictions is crucial, particularly for Indigenous communities with strong ties to their land
Why is the affordability of flood insurance premiums important?
It enables equitable access to insurance, supporting socio-economically disadvantaged groups
What other factors, besides money, influence access to flood insurance?
- Removing barriers
- Promoting financial literacy
- Building community capacity
- Adapting national solutions to regional or cultural contexts.
How should Indigenous perspectives be incorporated into flood risk management?
Indigenous knowledge and perspectives should inform flood risk management
(with further engagement and respect for the cultural connections of Indigenous peoples to water and land)
