Flood Risk

Question 1

Why was the Task Force on Flood Insurance and Relocation established?

Answer 1

To explore solutions for high-risk areas and potential relocation strategies (note that the task force prioritized engagement with Indigenous communities)

Question 2

Identify 5 priority areas for action under EMS (Emergency Management Strategy)

Answer 2

1) Enhance whole-of-society collaboration and governance to strengthen resilience

2) Improve understanding of disaster risks in all sectors of society

3) Increase focus on whole-of-society disaster prevention and mitigation activities

4) Enhance disaster response capacity and coordination and foster the development of new capabilities

5) Strengthen recovery efforts by building back better to minimize the impacts of future disasters

Question 3

What does Priority 3 include as a priority outcome?

FPT = priority 3

Answer 3

FPT governments assist in the development of options for sharing the financial risks of disasters
- could include engaging the private sector to develop an affordable private flood insurance model for the entire population, including clear incentives for mitigation of flood risks

Question 4

Define the term “risk” in the context of disasters

Answer 4

likelihood + the consequence of a specified hazard being realized

Question 5

Identify 3 problems pertaining to flood insurance in Canada

Answer 5

High cost
(especially for low-income households)
- Recent flood events cause increased premiums and possibly withdrawal of coverage altogether

Low Risk Awareness
- Information about floods, including flood maps, may be unavailable

Misaligned incentives
- Taxpayer-funded DFA programs contribute to moral hazard (because people may rely on that instead of buying insurance)

Question 6

Fully describe 3 problems due to low risk awareness of Canadians in high-risk areas

Moral hazard
(Homeowners, communities, regional/national)

Answer 6

In general:
- A moral hazard is the expectation that governments will provide post-DFA (regardless of poor decisions by individuals and communities on where to build)

In particular:
Homeowners: at the homeowner level, DFA doesn’t encourage risk reduction or insurance purchase

Communities: at the community level, local governments & developers, benefit from property sales & tax revenues, but flood recovery costs fall largerly on other levels of government

Regional & national: Cost-sharing of disaster recovery reduces incentives for risk reduction (which may include expensive infrastructure)

Question 7

Fully describe 3 problems due to low risk awareness of Canadians in high-risk areas

Answer 7

May not purchase ❌
When and where flood insurance is available, Canadians may not purchase it due to a lack of awareness of their level of flood risk, or they may erroneously assume flood risk is covered by standard home insurance.

Insufficient protection 😷
Homeowners who have purchased optional flood coverage may not have sufficient protection for the amount of risk they face
- Unfortunately, only after an event that homeowners discover they are under/un-insured.

Less likely risk reduction 🛠️
Low-risk awareness means homeowners are less likely to make investments in property-level protections for flooding, whether or not they have insurance.

Question 8

Briefly describe the concept of FRM (Flood Risk Management) (4)

Answer 8

• An alternative approach to conventional flood control measures
• Promotes the use of non-structural mitigation measures to complement and enhance other types of mitigation
• Stakeholders include: government, industry, communities, non-government organizations, individuals
• An iterative process of: acting, monitoring, reviewing, adapting

Question 9

Describe the concept of strategic relocation (4)

Answer 9

1) Buy a high-risk property (government if often the buyer)
2) Remove assets from high-risk property
3) Restore site to undeveloped state
4) Repurpose site as green infrastructure to better absorb floodwater (further reduces flood risk)

Question 10

Identify the inputs for the PS (Public Safety) approach for estimating flood damages (3)

Answer 10

Flood hazard:
- Refers to extent, magnitude (such as water depth or flow velocity) and probability of occurrence

Flood Exposure:
- Refers to the people, property, infrastructure and other social or economic assets which may become affected by flood hazard

Consequence (Flood Damages):
- How much damage floodwater is likely to cause to particular exposured people or assets

Question 11

Identify the design characteristics of flood insurance programs (4)

Answer 11

Administration: Role of Government vs Role of Private Insurers
Choice: Voluntary or Compulsory
Packaging: Standalone Product or Bundled with Other Perils
Premiums: Risk-based or Uniform Pricing

Question 12

Describe the flood insurance program in: Australia

Answer 12

Administration: government regulates the industry with minimum financial burden
- Promotes private partnerships for risk management

Choice: Voluntary (both offering and uptake)
- Varied availability based on flood risk levels

Packaging: often bundled with other perils
- Coverage and specific flood-related perils vary by insurer

Premiums: Risk-based
- Not regulated or subsidized by the government
- Potentially high for highest risk properties
- Retrofits recognized in premium calculations (& encouraged)

Question 13

Desribe the flood insurance program in: France

Answer 13

Administration: government oversees CatNat scheme
- CatNat is supported by state-owned CCR (that reinsures insurers)
- Local governments are encouraged to adopt risk reduction plans

Choice: depends
- Home insurance (including CatNat) compulsory for property owners with a mortgage
- Voluntary otherwise

Packaging: Bundled
- CatNat, covering flood and other natural disasters, is added to all property insurance contracts

Premiums: Uniform pricing
- 12% surcharge on home insurance policies for natural disasters
- No incentive for property-level mitigation

Note: CCR = Caisse Centrale de Reassurance

Question 14

Describe the flood insurance program in: UK

Answer 14

Administration: Flood Re manages the flood insurance system
- The Flood Re pool is a private sector entity accountable to the government

Choice: depends
- Not compulsory by law but often required by mortgage lenders for high-risk properties
- Voluntary for properties without a mortgage or for low-risk properties
- Availability for high-risk properties limited to those built prior to 2009

Packaging: Bundled with homeowner’s policies
- Ceded to Flood Re when premiums exceed an affordability cap

Premiums: reflect home values rather than risk level
- Affordability is priortized
- Supplemented by a levy on all residential properties
- A criticism is that high-value properties (wealthy homeowners) are effectively subsidized

Question 15

Describe the flood insurance program in: US

Answer 15

Administration: NFIP (National Flood Insurance Program) administered through FEMA (Federal Emergency Management Agency)
- Some involvement from private insurers (roles of varying degree and are paid a fee)

Choice: Depends
- Compulsory for homeowners with federally-backed mortgage in flood-prone areas
- Voluntary elsewhere

Packaging: standalone

Premiums: risk based
- Some older government-subsidized policies will transition to risk-based
- Discounts for communities implementing risk-reduction measures

Question 16

Identify the 4 themes identified to help guide the development of policy options in Canada

Answer 16

Uncertainty (want to minimize this)

Market Penetration, adverse selection and mutuality (want to maximize this)

Affordability (design for this or uptake of flood insurance will be low, especially for high risk areas)

Moral Hazard (want to minimize this)

Question 17

Briefly describe the policy goals/objectives of Canada’s Task Force on Flood Insurance

Answer 17

3. Provide adequate and predictable financial compensation for residents in high-risk areas
   - Key themes: adequate coverage, reliability/consistency/clarity of coverage
4. Incorporate risk-informed price signals and other levers that promote risk-appropriate land use, mitigation, and improved flood resilience
   - Key themes: Improve risk awareness for people, communities, and governments, Reduce perverse incentives that sustain/increase residential flood risk
5. Be affordable to residents of high-risk areas, with specific considerations for marginalized, vulnerable, and/or diverse populations
   - Key themes: Inclusive, equitable access to insurance
6. Provide coverage that is widely available for those at high-risk across all regions
   - Key themes: availability (fluvial, pluvial, coastal) in all geographic regions, incorporating dynamic changes to risk over time. Coverage should be available in practical ways for people to access
7. **Maximize participation88 of residents in high-risk areas
   - Key themes: Ensure that within any option selected, uptake is maximized
8. Provide value for money for governments and taxpayers
   - Key themes: Flood insurance solution should (over time) reduce burden on public DFA for flooding, shifting expenditures from recovery to mitigation and adaptation. Should be cost-effective and sustainable

Question 18

Assumptions used in Flood Risk Models

Answer 18

Total Flood Risk: 2.9B annual residential flood damage

Organizational start-up costs: not included (but on-going operational and maintance expenses are included)

Lifespan of Model: 25 yrs

Climate Change: Not considered (levels of risk are set to flood hazard models as of 2020)

Inflation: Not considered (difficult to predict but all models should be affected the same way anyway)

Question 19

How are the highest-risk homeowners for flood risk identified (top 10%)?

Answer 19

If AAL or premiums ≥ 0.1% of coverage (for ex: $300 premium for a $300K coverage)

Question 20

What are the 8 design features considered in the 4 insurance models from the Task Force on flood insurance

Answer 20

Threshold for “high risk homeowners”
Affordability
Premium Loading Factors
Cross Subsidization
Deductibles
Participation
Standardization of Flood Insurance Policies
Automatic Ceding of Flood policies

Question 21

Identify strategies for increasing affordability of flood insurance (2)

Answer 21

1) Premium caps
2) Subsidies based on income

Question 22

What is cross-subsidization?

Answer 22

A a way to redistribute the total amount of premiums paid by high-risk homeowners.
Low risk homeowners would pay a higher premium than if it were fully risk-adjusted, with the objective to reduce, at least in part, the premium paid by high-risk homeowners.

Question 23

How can low participation rates be improved in Canada where flood insurance is not mandatory? (2)

Answer 23

1) Awareness of risk through education
2) Incorporation of affordability supports / lowering premiums

Question 24

Flat Cap High Risk Pool model

Answer 24

General:
- A high-risk pool
- With minimal intervention by government
- But with low premium cap & significant support from government

Who is included?
- Households at high-risk of flooding

Income-based subsidies:
- None (because premium cap is only 500$)

Cross-Subsidization:
- 20$ levy on all policies

Participation Assumptions
- Mandatory offer
- Optional purchase
- Leads to only 50% participation for high-risks

Premium Loading Factor:
- 96% of AAL (predominantly as a result of additional living expenses, claims, and claims admin)

Question 25

Tiered Cap High Risk Pool

Answer 25

General:
- A high-risk pool
- With added intervention by government
- 5 levels of cap (based on quintiles of reconstruction costs)

Who is included?
- Households at high-risk of flooding

Income-based subsidies:
- None (because tiered premium caps)

Cross-Subsidization:
- 40$ levy on all policies

Participation Assumptions
- Mandatory offer
- Mandatory purchase with mortgage (optional without mortgage)
- Leads to 65% participation for high-risks (since around 65% of homes have mortgages)

Premium Loading Factor:
- 96% of AAL (predominantly as a result of additional living expenses, claims, and claims admin)

Standardization:
- Comprehensive bundling of water coverage

Question 26

Public Insurer

Answer 26

General:
- a Crown Corporation (corporation owned by government)
- underwrites flood insurance with private insurance as intermediary
- Higher premium cap ($3000) with automatic government backstop

Who is included?
- All households (low, medium and high risk)

Income-based subsidies:
- Sliding scale

Cross-Subsidization:
- 45$ levy on all policies

Participation Assumptions
- Mandatory offer
- Mandatory purchase (via bundling with homeowner’s policy)
- Leads to very high participation (90% for high risk)

Premium Loading Factor:
- 66% of AAL (predominantly as a result of additional living expenses, is lower because admin fees are charged directly to crown corporation)

Standardization:
- Comprehensive bundling of water coverage

Question 27

Public Reinsurer

Answer 27

General:
- A layered (using both public and private-based elements of previous models)
- 1st layer: optional purchase from private market at risk-based rates at modest limit (25K)
- 2nd layer: mandatory purchase above model limit but subsidized by crown corporation
- No premium cap for 1st layer, 3000$ cap for 2nd layer

Who is included?
- All households (low, medium and high risk)

Income-based subsidies:
- None for 1st layer, sliding scale for 2nd layer

Cross-Subsidization:
- 20$ levy on all policies

Participation Assumptions
- Mandatory offer, optional purchase for 1st layer
- Mandatory offer & purchase for 2nd layer (via bundling with homeowner’s policy)
- Leads to very high participation (90% high risk) for 2nd layer, low participation for 1st layer (35% high risk)

Premium Loading Factor:
- 1st layer: 166% of AAL (higher than previous models due to reins. costs, claims costs, additional living expenses, and enhanced safety margins)
- 2nd layer: 66% of AAL (predominantly as a result of additional living expenses, is lower because admin, distribution & overhead costs are assumed by private market)

Standardization:
- Comprehensive bundling of water coverage

Question 28

Adequacy & Predictability

Answer 28

Flat Cap High-Risk Pool: average
- Due to optional purchase, compensation may not be adequate due to inadequate coverages chosen by homeowners

Tiered High-Risk Pool: average
- Better than Flat Cap, but those not part of mandatory coverage may still have highly variable adequacy of coverage

Public Insurer: Strong
- Due to mandatory standardized coverage & comprehensive bundled flood coverage, coverage is likely to be adequate for majority of homeowners

Public Reinsurer: Strong
- Due to mandatory standardized coverage & comprehensive bundled flood coverage in 2nd layer, coverage is likely to be adequate for majority of homeowners

Question 29

Risk Reduction

Answer 29

Flat Cap High-Risk Pool: average
- Low premium cap does not incentivize strong risk reduction

Tiered High-Risk Pool: average
- Better than Flat Cap model, but even with progressive premium cap, does not incentivize strong risk reduction

Public Insurer: average
- High prem cap incentivizes risk reduction, but offset by income-based subsidies

Public Reinsurer: Strong
- Due to risk-based rates in layer 1, homeowners have strong incentive to reduce risks

Question 30

Affordability

Answer 30

Flat Cap High-Risk Pool: Strong
- Low premium cap leads to strong affordability

Tiered High-Risk Pool: average
- Although there is a progressive premium cap scale, it is based on home value and not on capacity of insureds to pay. Therefore, could be better

Public Insurer: Strong
- Combination of high premium cap & income-based subsidies leads to strong affordability score for this model

Public Reinsurer: Average
- Average due to same conditions as Public insurer in 2nd layer. However, 1st layer is not strong due to risk-based pricing which is usually unaffordable

Question 31

Availability

Answer 31

All models: Strong
- All models have comprehensive geographical coverage

Question 32

Participation

Answer 32

lat Cap High-Risk Pool: Weak
- Low premium cap is the only driver of participation for high risks, since not mandatory, leads to large residual risk (due to low participation)

Tiered High-Risk Pool: Average
- Better than Flat Cap model due to higher participation due to mandatory on homeowners with mortgages. However, still average due to overall low participation of high-risk homeowners (only 65%)

Public Insurer: Strong
- Mandatory bundling of flood insurance with home policies leads to almost perfect level of participation across all risk levels

Public Reinsurer: Strong
- Mandatory bundling of flood insurance with home policies leads to almost perfect level of participation across all risk levels (for 2nd layer)
- Participation more in line with pool models for 1st layer (so residual risk is between tiered model & public insurer)

Question 33

Residual Risk

Answer 33

Flat Cap High-Risk Pool: Weak
- Requires significant amount of government funding in order to provide affordable coverage (though only a portion of high-risk homeowners are likely to be covered)
- Leads to large residual risk (leads to more pressure on govt to provide ad-hoc relief)

Tiered High-Risk Pool: Average
- Better than Flat Cap model due to mandatory on homeowners with mortgages (so more balance for residual risk)
- Residual risk however is concentrated in high-risk areas

Public Insurer: Strong
- Has lowest overall residual risk, coming at higher cost to governments (which are more predictable)

Public Reinsurer: Strong
- Due to 1st & 2nd layer approach, more residual risk than public insurer but isn’t terrible overall since is majorly for first layer which covers small events, so losses to govt will be on smaller scale

Question 34

Grid for Model Objectives

Answer 34