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
describe potential effects of increased private involvement in flood insurance
more choice:
- higher limits
- expanded coverages like business interruption
lower prices:
- lower-risk, non-subsidized NFIP customers may pay less privately
variable protections:
- consumer protections for private policies are enforced at the state level
- there’s a large variation between states
adverse selection:
- private companies may cherry-pick profitable, low-risk policies from NFIP
- leaves NFIP with underpriced high-risk policies
- weakens its future ability to pay claims
impaired flood mapping & floodplain management:
- NFIP pays for flood mapping and floodplain management with policy fees
- a decrease in NFIP policies weakens NFIP’s ability to perform these functions
describe potential effects of increased private involvement in flood insurance on federal disaster relief
increase or decrease in federal expenditures accepted with appropriate reasoning:
increase:
• NFIP may experience adverse selection
• customers remaining in NFIP will be higher-risk and more costly to compensate after a disaster
decrease:
• private insurers will share costs with NFIP after a disaster
• fewer homes will be uninsured so disaster relief is less costly
describe potential effects of increased private involvement in flood insurance potential customers
adverse selection:
- private companies may cherry-pick profitable, low-risk policies from NFIP
- leaves NFIP with underpriced high-risk policies
- weakens its future ability to pay claims
briefly describe a reason for the creation of NFIP
fill an unmet need in the private insurance marketplace
briefly describe the extent of subsidization in NFIP
several subsidies are offered such as grandfathering and newly mapped subsidies
describe a policy, other than premium subsidies, aimed at increasing participation rates
many answers including that flood coverage is required for a federally backed mortgage
(see examiner’s report)
