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CAS Exam 6C > IBC - Flood 2019 > Flashcards

IBC - Flood 2019 Flashcards

1
Q

Overall goal of 2019 reading

A

Present options for transferring residential property flood risk from public sector to the private sector

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2
Q

Principles for the financial management of flood risk (6)

A 
Shield the taxpayer
Efficiency
Affordability 
Financial sustainability 
Optimal compensation 
Inclusivity
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3
Q

Define shield the taxpayer

A

Reduce taxpayer funded subsidies by encouraging private insurers market

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4
Q

Define Efficiency principle for financial management of flood risk

A

Rates should be risk based to incentivize risk mitigation among stakeholders

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5
Q

Define affordability principle for financial management of flood risk

A

Ensures maximum participation by high risk insureds

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6
Q

Define financial sustainability principle for financial management of flood risk

A

Reduce systemic losses to support sustainability

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7
Q

Define optimal compensation principle of financial management of flood risk

A

Insurance should be predictable and sufficient to reduce publicly funded disaster assistance

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8
Q

Define inclusivity principle of financial management of flood risk

A

All primary residence property owners should be covered for any type of flood risk

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9
Q

Identify the 3 prongs in Canada’s flood disaster risk reduction approach

A

Elevate risk awareness/engagement
Improve risk identification
Aggressively mitigate risk

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10
Q

Describe elevate risk awareness/engagement

A

Convey risk assessment info to all participants during property development, transaction, financing and insurance processes

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11
Q

Describe ‘improve risk identification’

A

Continuously updated public facing risk maps

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12
Q

Describe ‘aggressively mitigate risk’

A

Discourage building in high risk areas, incorporate natural infrastructure to lower maintenance costs

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13
Q

Describe the ‘whole-of-society’ approach to financial management of flood risk and disaster risk reduction. (4)

A
  • leverage government partnerships in infrastructure to reduce climate risk in the most exposed communities
  • elevate risk awareness among consumers and businesses
  • incent de-risking efforts among consumers and businesses
  • enable insurers to introduce new products and premium structures to encourage responsible behaviour
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14
Q

Preconditions for commercially viable flood insurance in Canada (part 1)

A
  • accurate and up to date flood hazard mapping to help make smart decisions about asset management, urban planning and flood risk management
  • ongoing and adequate investment in public and private flood defences and sewer and storm water infrastructure
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15
Q

Preconditions for commercially viable flood insurance in Canada (part 2)

A

-widespread awareness of flood risk and sound understanding by all stakeholders of the physical and financial consequences of flood risk and the tools available to ensure Canadians are prepared

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16
Q

Preconditions for commercially viable flood insurance in Canada (part 3)

A

Access to post disaster assistance for residential flooding should be limited/structured in a manner that encourages investments in mitigation and strong disaster reduction behaviours

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17
Q

Options for financial management of floods

A

1) Pure market solution-risk borne by homeowners
2) Evolved status quo - risk borne by blend of homeowners, government through DFA (Disaster Financial Assistance)
3) high-risk flood insurance pool - risk borne by blend of homeowners, governments through capitalization (not DFA)

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18
Q

Identify the Homeowner’s choices for: Pure Market solution. (3)

A
  • self-insure (no formal coverage)
  • purchase private insurance
  • relocate out of flood-prone area
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19
Q

Does DFA (Disaster Financial Assistance) play a role for: Pure Market solution.

A

No, DFA provides no coverage in the Pure Market solution.

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20
Q

Describe the implications of risk-based premiums for: Pure Market solution. (3)

A
  • premiums would initially be unaffordable for many
  • affordability would improve (lowered costs) over time as the government develops infrastructure and buys-out properties that are in high-risk areas
  • the government could also introduce means-tested subsidies to increase participation rates
21
Q

Describe the international experience for: Pure Market solution. (2)

A

International experience shows these disadvantages:

  • Australia: participation rates are low among high-risk properties, due to high costs
  • Germany: government was pressured into provided disaster assistance after major floods, despite having a policy of not doing so
22
Q

Are risk-based premiums used for: Evolved Status Quo solution.

A

Yes, private insurers accept flood risks according to their risk appetite.

23
Q

Describe DFA (Disaster Financial Assistance) involvement for: Evolved Status Quo solution. (2)

A
  • government DFA (Disaster Financial Assistance) programs provide some coverage (specifically to uninsured, high-risk properties where coverage is unaffordable)
  • but, provincial DFA programs vary greatly among provinces so DFA compensation is not predictable
24
Q

Does DFA (Disaster Financial Assistance) incentivize homeowners to engage in risk mitigation for: Evolved Status Quo solution.

A

No, because homeowners know they will be covered after a disaster anyway.

25
Q

Does DFA (Disaster Financial Assistance) incentivize governments to engage in risk mitigation for: Evolved Status Quo solution.

A

Yes, and risk mitigation by government broadly lowers risk so that private insurances can then accept most/all risks.

26
Q

Describe the international experience for: Evolved Status Quo solution.

A
  • US & Mexico: government reduces exposure by transferring some of the risk to global (re)insurance markets.
27
Q

Identify the purpose for: High-Risk Pool solution.

A

A high-risk flood pool contains properties that would not otherwise be offered affordable insurance.

28
Q

Describe the administration and governance for: High-Risk Pool solution. (2)

A
  • administration by the insurance industry

- governed and guaranteed by government/global reinsurance market

29
Q

What are the operational elements for: High-Risk Pool solution. (4)

A

1) high-risk property-owners could be offered overland flood coverage through their existing insurer;
2) insurer decides whether to keep the risk, or to forward it to the pool;
3) insurer collects premium and remits them to the pool (provides a source of capital to the pool);
4) other sources of pool capital:
- governments
- homeowner levies
- municipal property tax levies

30
Q

Are risk-based premiums used for: High-Risk Pool solution.

A

Premiums should be risk-based, but could also be capped and subsidized to ensure maximum participation.

31
Q

Identify the stages of capitalization for a high-risk flood pool. (2)

A

Step 1: initial capitalization

Step 2: low-maintenance capitalization

32
Q

Describe Stage 1 capitalization for a high-risk flood pool. (4)

A
  • the pool will initially require outside capitalization over a transition period before becoming self sufficient from premiums
  • capital sources can be: government contributions, levies on homeowners and municipal ratepayers
  • contributions are temporary until the pool becomes fully capitalized
  • during the temporary period, governments could pay all incoming claims (to limit drawdowns on pool capital)
33
Q

Describe Stage 2 capitalization for a high-risk flood pool. (2)

A
  • the pool requires ongoing low-maintenance capitalization to offset subsidies from capping premiums
  • maintenance capital sources can be: government contributions, levies on homeowners and municipal ratepayers
34
Q

How can we reduce the burden on governments and taxpayers in maintaining capitalization of high-risk flood pools?

A

We can reduce the subsidies for high-risk insureds by offering lower-priced policies, achieved by having structures with lower limits and/or higher deductibles. Note that premiums would still be risk-based.

35
Q

Does DFA (or DFAA) pay more for infrastructure rebuilding or for compensation for residential losses after an overland flooding event?

A

DFA pays more for infrastructure rebuilding (roughly 90% of total costs).

36
Q

Types of overland flooding (3)

A

1) Fluvial/flood plain flooding - when a river overflows its banks
2) Pluvial/urban flooding - when a heavy rainfall overwhelms urban drainage systems
3) coastal flooding - when a storm surge floods coastal areas

37
Q

What is the easiest type of overland flooding to model?

A

Fluvial/flood plain flooding, because it’s correlated with topography.

38
Q

What proportion of Canadians now have coverage for overland flooding?

A

Approximately 1 in 3.

39
Q

Preconditions for strong flood risk management. (4)

A

1) awareness among policyholders of risk, risk mitigation, financial mgmt of flood risk
2) infrastructure - levies, sewers
3) maps of flood risk - for planning & mgmt
4) $ - limited government compensation to incentivize risk mitigation among policyholders

40
Q

Briefly describe DFAA (or DFA) in Canada. (2)

A
  • provincial governments have a responsibility for disaster management
  • the federal DFAA program reimburses provinces for some of the disaster response costs
41
Q

Identify the main eligibility requirement for a homeowner to receive financial assistance in a disaster.

A

It requires that the homeowner has suffered damage that was due to an event that could not be insured.

42
Q

Identify a province with an exception to the standard disaster assistance eligibility requirement.

A

Ontario, because they may still cover what are considered ‘essential losses’ even if appropriate insurance was available to the homeowner.

43
Q

Why do many high-risk property owners in Australia not purchase flood insurance?

A

Because the risk-based premiums (due to private market) are too expensive (unaffordable).

44
Q

Is the U.S. National Flood Insurance Program public or private?

A

Public, however, the goal is to transition to a risk-based funding model. This goal has been unsuccessful to date.

45
Q

What is the focus of the flood risk program in the Netherlands?

A

Risk mitigation focus. The ultimate goal is the transition all communities to risk levels that are insurable.

46
Q

What is the long-range goal of the U.K.’s ‘Flood Re’ program?

A

Mitigate flood risks so that high-risk regions can transition into an affordable risk-based system by 2039.

47
Q

Identify 1 key strength and 1 key weakness of the Pure Market solution to flood risk.

A
  • Strength: efficiency in leveraging market incentives to encourage de-risking behaviours.
  • Weakness: potential for property owners to avoid being subject to these incentives (recall: low take-up rates in Australia).
48
Q

Identify 1 key strength and 1 key weakness of the Evolved Status Quo solution to flood risk.

A
  • Strength: simplest solution to implement as it does not require any major change in the current system.
  • Weakness: solution is expensive and not fiscally sustainable
49
Q

Identify 1 key strength and 1 key weakness of the High-Risk flood pool solution to flood risk. (3,2)

A

Strengths:

  • allows for a transition to building more climate resilient communities
  • promotes risk-sharing among property owners, private insurers and all levels of government
  • delivers insurance payments rather than public assistance

Weaknesses:

  • setup and operation of the pool is expensive
  • setup and operation of the pool may take many years (could be due to negotiations required among levels of government.

CAS Exam 6C (70 decks)

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