IBC - Flood Flashcards
What are the preconditions for strong Flood Risk Management culture? (4)
- need FLOOD MAPS
- good INFRASTRUCTURE
- policyholder AWARENESS of risk, method of risk mitigation and financial management for flood
- INCENTIVE for individual risk management
What are the reasons for non-coverage of OVERLAND flooding? (3)
- fears of ADVERSE selection
- government UNDERINVESTMENT in risk planning and mitigation
- lack of effective flood hazard MAPS
List 4 examples of government underinvestment in risk planning.
- building codes are obsolete
- asset management is poor
- infrastructure is lacking
- land use planning is inadequate
Why do insurers often cover uninsured floods?
- multi-peril causes from sewer (which is covered) and overland flooding (which is not covered)
- difficult to separate the above, so insurers pay everything to avoid reputational damage and political pressure
How is the weather changing in Canada?
In the past 60 years:
- TEMPERATURE has increase by 1.3C, which double the global average
- RAINFALL has increased an average of 12%
What are some trends that are making financial management of floods difficult? (5)
- GROWTH of population, density, and asset values
- CONCENTRATED development in flood-prone areas
- severe WEATHER
- vulnerability due to obsolete BUILDING codes
- UNDERINVESTMENT
What is the availability of flood coverage?
Residential: - overland flooding: no - sewer: yes, but by endorsement Auto, commercial: overland flooding: yes
Why is overland flooding not insurable?
- insurability requires that there is randomness, uncertainty and uncorrelated risks
- floods are predictable and correlated, and a large # of properties are affected at the same time
What are the categories for international flood management approaches? (6) (hint: MPPPSG)
- Model: public or private
- Purchase: mandatory or voluntary
- Packaging: bundled or optional
- Pricing: set by the government, or risk-based pricing
- Subsidies: provided by other policyholders or through taxes
- Government’s role: insurer or enabler
Describe the flood insurance program in the UK with respect to the 6 variables.
- Model: private
- Purchase: voluntary
- Packaging: bundled with home insurance
- Pricing: risk-based pricing
- Subsidies: subsidized by policyholders
- Government’s Role: they are an enabler through risk mitigation, flood mapping, and zoning
The uptake of this program is ~95%
UK flood insurance - Purpose (3)
- sustainability
- maintain AA (affordability and availability)
- 25 years transition to full private risk-based pricing
UK flood insurance - How does it work? (2+2)
- target only high-risk properties (through risk-mapping)
- coverage for homes built after 2009 is excluded in order to discourage the building of homes in high-risk areas
IF insurer’s risk-based price is > price ceiling, then chage the ceiling price and cede the flood insurance
IF insurer’s risk-based price is <= ceiling, then insurer may retain the risk
UK flood insurance - How is affordability ensured?
Through price ceilings.
UK flood insurance - What is the role of the government?
They set the price ceilings, provide financial relief for CATs exceeding the pool capacity, and invest in infrastructure.
Why is having a flood program better than having a governmental disaster relief program? (2)
- Insurance INDEMNIFIES where the government provides basic relief only
- Insurance INCENTIVIZES through risk-based pricing whereas government relief is taxpayer funded, so no individual incentive for risk mitigation
What is the cause and what are some remedies for the low uptake of flood insurance.
CAUSE: adverse selection
REMEDIES: make the coverage mandatory, or bundle it with other products or perils
State 1 advantage and 1 disadvantage on bundling flood insurance for low-risk policyholders.
DISADVANTAGE: low-risk policyholders would be subsidizing high-risk policyholders
ADVANTAGE: weather trends mean that previously low-risk areas may suffer a flood disaster, and bundling ensures that the low-risk areas would be covered
What is the role of the insurer in private flood insurance? (4)
- U/W: distinguishing the low & medium risks from the HIGH risks
- PRICING: use risk-based pricing
- EDUCATION: educate policyholders regarding the risks, financial management, and mitigation of floods
- CLAIMS: pay covered losses in a timely manner
What is the role of the government in supporting private flood insurance? (4)
- MITIGATION: promote mitigation of risk ((structural: infrastructure, …) & (non-structural: zoning, …))
- EDUCATION: regarding awareness & management of flood risk
- SUBSIDIES: provide subsidies to high-risk households where risk-based pricing is unaffordable
- ASSESSMENT; of risk through accurate flood maps
Why may the government still need to supplement private flood insurance? (2)
- private insurance may have coverage limits that are exceeded in a major disaster (so the government pays the amount not covered)
- the government may subsidize otherwise uninsurable risks through taxation
How can flood insurance unaffordability for high-risk customers be addressed? (2)
BUNDLING: bundle flood with standard homeowner’s policy (low-risk customers subsidize the high-risk customers)
SUBSIDIES: the government can provide subsidies through taxation
How is Canada starting to address flood management issues?
The 2014 EAP (Economic Action Plan) proposes developing NDMP (National Disaster Mitigation Plan).
What are the NDMP objectives? (2)
- a proactive approach to disaster risk management
- to reduce the impact of natural catastrophes on Canadians
Identify policy conditions to discourage development in a flood plain. (2)
- require flood protection for policy activation
- large, risk-based deductibles
