IBC.Flood2016 Flashcards
What is the Flood 2016 paper about?
Best practices for financial management of flood risk
Examines international flood insurance programs (both public and private) and look at implications for creating a Canadian flood insurance program.
What is the status of overland flood coverage in Canada?
Historically not available
What are the 3 specific reasons for non-coverage of overland flooding?
- Adverse selection (if offered, would be too expensive)
- Gov under-investment in risk (planning and mitigation)
- Lack of effective flood hazard maps
Identify 4 examples of gov under-investment in flood management.
(Trick = BAIL)
- Building codes are obsolete
- Asset management is poor
- Infrastructure is lacking
- Land use planning is inadequate
Who bears flood costs (given limited flood insurability)?
Taxpayers (through DFAA), although insurers often pay a significant proportion despite overland exclusion.
Identify 3 trends making financial management of floods difficult.
- Growth (pop, density, asset values)
- Concentrated dev in flood-prone areas
- Severe weather
- Vulnerability due to obsolete building codes
- Under-investment
Identify 3 flood causes.
- Snow-melt runoff
- Storm rainfall
- Structural failure (dams, levies)
- Tidal flooding
- Natural dam failure (ice jams, glaciers)
True or False?
Residential overland flooding coverage is available.
False
True or False?
Commercial overland flooding is available.
True
Is residential sewer coverage available?
Yes, by endorsement.
Identify 2 reasons why insurers often cover uninsured floods.
- Multi-perils causes from sewer (covered) and overland flooding (not covered) = Difficult to separate so insurers just pay everything
- Avoid reputational & political pressure
Identify 2 reasons why overland flooding is not insurable.
- Insurability requires randomness, uncertainty and uncorrelated risks.
- Floods are predictable, correlated and large # of properties are affected at the same time.
Describe the mechanism for post-disaster relief.
DFAA:
- Administered by Federal Government
- Funded by taxpayers
Identify the 6 variable categories for international flood management approaches.
- Model: public/private
- Purchase: mandatory/voluntary
- Package: bundled/optional
- Pricing: Gov-mandated/risk-based
- Subsidies: policyholder/taxes
- Gov role: insurer/enabler
Which countries (2) use public model?
France & United States
Which countries (3) use bundled packaging?
France
Japan
United Kingdom
Which country use mandatory purchase?
France
Which countries (2) use government pricing?
France & United States
Which countries (3) use policyholder subsidies?
Japan
United Kingdom
France (both taxpayer & policyholder)
Which country provides no subsidies?
Germany
Which countries (2) use insurance as Gov role?
France & United States
Describe the U.K. flood insurance system in terms of the 6 variables.
Uptake: 95%
1. Private
2. Voluntary
3. Bundled: automatically included into HO policies
4. Risk-based pricing
5. Policyholder subsidies (mainly)
6. Enabler: gov is involved in a support role by providing flood mitigation, flood mapping, building zoning to discourage construction in flood-prone areas.
What was the 1961 flood insurance program in U.K.?
Gentleman’s agreement:
Insurers cover all risks if gov provides risk mitigation and infrastructure investment.
Why was the 1961 program unsustainable? (2 reasons)
- Gov under-investment
- Weather trends
After the gentleman’s agreement, what was the new flood insurance program?
Statement of principles:
- Insurers cover 1-in-75 years flood areas only if gov provides new investment
- Insurer, gov, policyholder all have roles (policyholder role is to buy insurance & help mitigate risks)
Why was the statement of principles unsustainable? (2 reasons)
- Gov under-investment
- Existing insurers were forced to retain high-risk policyholders but new entrants were not.
What was the 2013 new insurance program in U.K.?
Flood Re:
- Non-profit RSP
- Operated by insurers to subsidize high-risk policyholders
- Gov provides a backstop for excess losses
Identify 3 purposes of the U.K. flood insurance program.
- Sustainability
- Maintain availability & affordability
- 25y transition to full private risk-based pricing
How does the U.K. flood insurance program work?
- Target only high-risk properties (identified through risk mapping)
- Excludes home built after 2009 to discourage building in high-risk areas
- If insurer’s price > ceiling => charge ceiling & cede to flood reinsurance
- If insurer’s price < ceiling => insurer may retain risk
Who paid for the startup costs in the U.K. flood insurance program?
Industry (10M pounds)
What are the reinsurance arrangements in the U.K. flood insurance program?
- Purchased reinsurance to cover 200y flood events
- Insurers not liable beyond this level
How is affordability ensured in the U.K. flood insurance program?
Price ceiling
Identify the 3 roles of the government in the U.K. flood insurance program.
- Set prices ceilings
- Financial relief for CATs exceeding pool capacity
- Infrastructure investment
Describe the U.S. flood insurance program with respect to the 6 variables.
Uptake = 20-30%
1. Public
2. Voluntary
3. Optional add-on
4. Risk-based pricing (gov set rates & U/W)
5. Taxpayers subsidies
6. Insurer & enabler: gov pays claims but private insurers can still service & U/W policies
In the U.S., compare the roles of government vs private insurance.
Gov set rates and U/W policies
Taxpayers cover shortfalls
Private insurers write and service policies
Evaluate the U.S. National Flood Insurance program using criteria for evaluating government programs.
- Insurance b/c people pay premiums and only covered losses are paid out
- Necessary since private flood insurance is insufficient and b/c of climate changes
- Efficient since costs are lower due to the fact that there are no commissions or advertising costs
Why is having a flood insurance program better than government disaster relief?
Insurance indemnifies whereas gov provides basic relief only
Insurance incentivizes through risk-based pricing whereas gov relied is taxpayer funded, so no individual incentive for risk-mitigation.
What are the cause & remedies for low uptake of flood insurance?
Cause: adverse selection
Remedies:
- Make it mandatory
- Bundle with other products/perils
- Taxpayers subsidies for high-risk insured
- Public/Gov administration
What are the advantages (3) of bundling flood insurance?
- Higher uptake
- Reduces adverse selection*
- Promotes affordability
- Not only high-risk will purchase => Cross-subsidization of high-risk insureds with low-risk insureds
State 1 advantage and 1 disadvantage of bundling flood insurance for low-risk policyholders.
+ : Ensures low-risk areas are covered.
- : Low-risk subsidize high-risk.
What are the roles (4) of the insurer in private flood insurance?
(PUCE)
- Pricing (risk-based)
- U/W: distinguish low/medium risks from high risks
- Claims: pay covered losses in timely manner
- Education: risk, financial management and mitigation
What are the roles (4) of government in supporting private flood insurance?
(SEMA)
- Subsidies: for high-risk households where premium is unaffordable
- Education: awareness & management of flood risk
- Mitigation: both structural (infrastructures) & non-structural (zoning)
- Assessment of risk through accurate flood plain maps
Describe 2 advantages and 2 disadvantages of public and mandatory flood insurance system.
+ :
1. High participation
2. Affordable
- :
1. Gov rates may not be actuarially sound
2. Low risk subsidies high-risk (unfair)
Describe 2 advantages and 2 disadvantages of a private & voluntary flood insurance system.
+ :
Risk based pricing is
1. Actuarially sound
2. Incentive to mitigate risk
- :
1. Adverse selection (only high-risks purchase)
2. Rates may be unaffordable (due to adverse selection)
Why may government still need to supplement private flood insurance?
Private insurance may have coverage limits
Gov may subsidize otherwise uninsurable risks through taxation
Which G8 country do not offer flood insurance coverage?
Canada
Identify 2 ways to address flood insurance un-affordability for high-risk customers.
- Bundling (low-risk subsidize high-risk)
- Gov can provide subsidies through taxation
How is Canada starting to address flood management issues? (2)
- 2014 Economic Action Plan (EAP)
- Developing National Disaster Mitigation Plan (NDMP)
What are the 2 NDMP objectives?
- Proactive approach to disaster risk management
- Reduce impact of natural cats on Canadians
Design & justify a flood insurance model that maximizes uptake & affordability. (4 characteristics)
- Make it mandatory
=> uptake closer to 100%
=> low-risk subsidize high-risk - Bundle with prop insurance
=> offer opt-in v opt-out to improve uptake - Risk-based pricing
=> incentivizes risk management => increase affordability - Gov invests in infrastructures
=> decreases potential losses => increases affordability
Identify 2 policy conditions to discourage development in a flood-prone area.
- Require flood protection for policy activation
- Large risk-based deductibles
