Horn2020-Flood Flashcards
briefly describe NFIP (National Flood Insurance Program)
a federal flood insurance program administered by FEMA (Federal Emergency Management Agency)
- main provider of primary residential flood coverage (versus private flood insurance)
- involves private insurers and all tiers of government
- created in 1968 and participation is voluntary
what are the policy goals of NFIP
Access:
→ provide access to primary insurance (transfers some of the financial risk to the federal government)
Mitigate & Reduce:
→ mitigate & reduce flood risk through floodplain management standards
what are the objectives of NFIP according to Horn & Webel
Risk-based premiums (incentives policyholders to mitigate risk)
Affordability
Sustainability (premiums should cover claims costs & expenses)
High participation rates
identify ways that NFIP is different from traditional private insurance
social goals: (of NFIP)
- provides coverage to high-risk customers who would not be able to obtain affordable coverage in the private market
non-insurance goals:
- distribute flood maps (to assist with flood-risk management)
- require land use and building standards for participation in NFIP
- reduce the need for other post-flood disaster aid
- fund rebuilding after a flood (makes it easier for people to recover)
- protect lenders against mortgage defaults due to uninsured losses
how are these concepts related: FEMA-FIRMS-SFHAs (thx CH!)
recall: FEMA = Federal Emergency Management Agency FIRMs = Flood Insurance Risk Maps SFHAs = Special Flood Hazard Areas then: FEMA makes FIRMS FIRMs identify SFHAs
identify situations where purchase of flood insurance is mandatory
- for property owners in a SFHA with a federally backed mortgage
- when a mortgage lender specifically requires participation (even if outside a SFHA)
describe flood insurance pricing & subsidies through NFIP
rates should be risk-based but Congress has authorized FEMA to admit certain exceptions as follows:
pre-FIRM: properties built or improved before December 31, 1974, or before the first FIRM for their community
(whichever is later)
newly mapped: properties mapped to a SFHA on/after April 1, 2015
(if applicant obtains coverage within 12 months of map revision date)
grandfathered: properties originally built in compliance with FIRM
(even if they are subsequently mapped into a higher-priced class)
identify ways that private insurers can be involved in flood insurance (4)
- service policies (marketing, selling, writing, claims management)
- share risk with FEMA
- assume full risk as primary insurer
- assume a portion of risk as a reinsurer
describe servicing arrangements available to private companies within NFIP (2)
Direct Serving Agent: (DSA)
- private contractor for FEMA
- facilitates purchase of flood insurance directly from NFIP
Write-Your-Own program: (WYO)
- private companies directly write and service policies themselves
- the majority of NFIP policies are currently written through WYO
describe the NFIP risk management tools of private reinsurance and capital markets
private reinsurance:
- purchase from a varied group of reinsurers with each bearing part of the risk
capital markets:
- catastrophe bond reinsurance is facilitated by a single company
- risk is then transferred to capital market investors who purchase the bonds
- investors pay a certain percentage of the losses from a single, large scale event
describe advantages & disadvantages in using private reinsurance for NFIP (2+3)
advantages:
- FEMA knows the cost of (some) of its flood risk up front instead of borrowing from the Treasure after a flood
(the cost is just the cost of the reinsurance policy)
- reinsurance reduces the volatility of losses
(this helps manage risk)
disadvantages:
- expected value of long-term costs is higher because reinsurers must be compensated for assuming risk
(in addition to paying out claims)
- NFIP may have insufficient funds after reinsurance premiums to pay claims it retains
- NFIP may have insufficient funds after reinsurance premiums to fulfill other goals & objectives
(risk mitigation, flood mapping)
why do private insurers consider flood risk to be uninsurable (4)
- catastrophic nature of flooding
- pricing difficulties
(data is highly variable from year to year, unlike auto pricing which has a stable data history) - adverse selection
(only high-risk customers would purchase flood coverage) - affordability
(risk-based pricing could lead to unaffordable rates for high-risk customers who need it the most)
what are the most common types of private flood insurance (3)
- commercial coverage
- secondary coverage
(excess coverage above NFIP maximums, coverage for business interruption,…) - lender-placed coverage
(that’s when a bank forces a borrower to obtain coverage to protect the bank’s loan)
identify issues & barriers to private flood insurance (7)
list of issues: (see wiki for more details)
(1) coverage must be “at least as broad” as NFIP coverage (barrier: hard to determine)
(2) continuous coverage requirement (barrier: does private insurance “count”)
(3) non-compete clause (barrier: WYO can’t sell NFIP-type policies)
→ non-compete clause removed beginning fiscal year 2019)
(4) NFIP subsidized rates (barrier: private insurers can’t compete with that)
(5) regulatory uncertainty (barrier: states all have different rules)
(6) accurate assessment of flood risk (barrier: private insurers don’t have credible data)
(7) participation rates (barrier:must be high to spread risk)
briefly describe how issues & barriers to private flood insurance can be addressed (7)
addressing issues & barriers: (see wiki for more details)
(1) replace “at least as broad” with “comply with state regulations”
(2) pass a federal law that private insurance counts when assessing continuous coverage
(3) eliminate the non-compete clause (or give WYOs temporary reprieve)
→ non-compete clause removed beginning fiscal year 2019)
(4) reform NFIP rate strucutre so that prices match what a private insurer would charge
(5) don’t change anything - state level authority may be better in the long-term because it encourages state-specific solutions
(6) remove personally identifiable information from NFIP data then make data public
(7) expand mandatory purchase requirement
