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Exam 6C - F2022 > IBC.Flood2016 > Flashcards

IBC.Flood2016 Flashcards

1
Q

What is the Flood 2016 paper about?

A

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.

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2
Q

What is the status of overland flood coverage in Canada?

A

Historically not available

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3
Q

What are the 3 specific reasons for non-coverage of overland flooding?

A
  1. Adverse selection (if offered, would be too expensive)
  2. Gov under-investment in risk (planning and mitigation)
  3. Lack of effective flood hazard maps
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4
Q

Identify 4 examples of gov under-investment in flood management.
(Trick = BAIL)

A
  1. Building codes are obsolete
  2. Asset management is poor
  3. Infrastructure is lacking
  4. Land use planning is inadequate
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5
Q

Who bears flood costs (given limited flood insurability)?

A

Taxpayers (through DFAA), although insurers often pay a significant proportion despite overland exclusion.

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6
Q

Identify 3 trends making financial management of floods difficult.

A
  1. Growth (pop, density, asset values)
  2. Concentrated dev in flood-prone areas
  3. Severe weather
  4. Vulnerability due to obsolete building codes
  5. Under-investment
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7
Q

Identify 3 flood causes.

A
  1. Snow-melt runoff
  2. Storm rainfall
  3. Structural failure (dams, levies)
  4. Tidal flooding
  5. Natural dam failure (ice jams, glaciers)
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8
Q

True or False?
Residential overland flooding coverage is available.

A

False

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9
Q

True or False?
Commercial overland flooding is available.

A

True

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10
Q

Is residential sewer coverage available?

A

Yes, by endorsement.

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11
Q

Identify 2 reasons why insurers often cover uninsured floods.

A
  1. Multi-perils causes from sewer (covered) and overland flooding (not covered) = Difficult to separate so insurers just pay everything
  2. Avoid reputational & political pressure
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12
Q

Identify 2 reasons why overland flooding is not insurable.

A
  1. Insurability requires randomness, uncertainty and uncorrelated risks.
  2. Floods are predictable, correlated and large # of properties are affected at the same time.
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13
Q

Describe the mechanism for post-disaster relief.

A

DFAA:
- Administered by Federal Government
- Funded by taxpayers

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14
Q

Identify the 6 variable categories for international flood management approaches.

A
  1. Model: public/private
  2. Purchase: mandatory/voluntary
  3. Package: bundled/optional
  4. Pricing: Gov-mandated/risk-based
  5. Subsidies: policyholder/taxes
  6. Gov role: insurer/enabler
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15
Q

Which countries (2) use public model?

A

France & United States

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16
Q

Which countries (3) use bundled packaging?

A

France
Japan
United Kingdom

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17
Q

Which country use mandatory purchase?

A

France

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18
Q

Which countries (2) use government pricing?

A

France & United States

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19
Q

Which countries (3) use policyholder subsidies?

A

Japan
United Kingdom
France (both taxpayer & policyholder)

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20
Q

Which country provides no subsidies?

A

Germany

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21
Q

Which countries (2) use insurance as Gov role?

A

France & United States

22
Q

Describe the U.K. flood insurance system in terms of the 6 variables.

A

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.

23
Q

What was the 1961 flood insurance program in U.K.?

A

Gentleman’s agreement:
Insurers cover all risks if gov provides risk mitigation and infrastructure investment.

24
Q

Why was the 1961 program unsustainable? (2 reasons)

A
  1. Gov under-investment
  2. Weather trends
25
Q

After the gentleman’s agreement, what was the new flood insurance program?

A

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)

26
Q

Why was the statement of principles unsustainable? (2 reasons)

A
  1. Gov under-investment
  2. Existing insurers were forced to retain high-risk policyholders but new entrants were not.
27
Q

What was the 2013 new insurance program in U.K.?

A

Flood Re:
- Non-profit RSP
- Operated by insurers to subsidize high-risk policyholders
- Gov provides a backstop for excess losses

28
Q

Identify 3 purposes of the U.K. flood insurance program.

A
  1. Sustainability
  2. Maintain availability & affordability
  3. 25y transition to full private risk-based pricing
29
Q

How does the U.K. flood insurance program work?

A
  • 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
30
Q

Who paid for the startup costs in the U.K. flood insurance program?

A

Industry (10M pounds)

31
Q

What are the reinsurance arrangements in the U.K. flood insurance program?

A
  • Purchased reinsurance to cover 200y flood events
  • Insurers not liable beyond this level
32
Q

How is affordability ensured in the U.K. flood insurance program?

A

Price ceiling

33
Q

Identify the 3 roles of the government in the U.K. flood insurance program.

A
  1. Set prices ceilings
  2. Financial relief for CATs exceeding pool capacity
  3. Infrastructure investment
34
Q

Describe the U.S. flood insurance program with respect to the 6 variables.

A

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

35
Q

In the U.S., compare the roles of government vs private insurance.

A

Gov set rates and U/W policies

Taxpayers cover shortfalls

Private insurers write and service policies

36
Q

Evaluate the U.S. National Flood Insurance program using criteria for evaluating government programs.

A
  • 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
37
Q

Why is having a flood insurance program better than government disaster relief?

A

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.

38
Q

What are the cause & remedies for low uptake of flood insurance?

A

Cause: adverse selection

Remedies:
- Make it mandatory
- Bundle with other products/perils
- Taxpayers subsidies for high-risk insured
- Public/Gov administration

39
Q

What are the advantages (3) of bundling flood insurance?

A
  • Higher uptake
  • Reduces adverse selection*
  • Promotes affordability
  • Not only high-risk will purchase => Cross-subsidization of high-risk insureds with low-risk insureds
40
Q

State 1 advantage and 1 disadvantage of bundling flood insurance for low-risk policyholders.

A

+ : Ensures low-risk areas are covered.

  • : Low-risk subsidize high-risk.
41
Q

What are the roles (4) of the insurer in private flood insurance?
(PUCE)

A
  • 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
42
Q

What are the roles (4) of government in supporting private flood insurance?
(SEMA)

A
  • 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
43
Q

Describe 2 advantages and 2 disadvantages of public and mandatory flood insurance system.

A

+ :
1. High participation
2. Affordable

  • :
    1. Gov rates may not be actuarially sound
    2. Low risk subsidies high-risk (unfair)
44
Q

Describe 2 advantages and 2 disadvantages of a private & voluntary flood insurance system.

A

+ :
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)
45
Q

Why may government still need to supplement private flood insurance?

A

Private insurance may have coverage limits

Gov may subsidize otherwise uninsurable risks through taxation

46
Q

Which G8 country do not offer flood insurance coverage?

A

Canada

47
Q

Identify 2 ways to address flood insurance un-affordability for high-risk customers.

A
  1. Bundling (low-risk subsidize high-risk)
  2. Gov can provide subsidies through taxation
48
Q

How is Canada starting to address flood management issues? (2)

A
  1. 2014 Economic Action Plan (EAP)
  2. Developing National Disaster Mitigation Plan (NDMP)
49
Q

What are the 2 NDMP objectives?

A
  1. Proactive approach to disaster risk management
  2. Reduce impact of natural cats on Canadians
50
Q

Design & justify a flood insurance model that maximizes uptake & affordability. (4 characteristics)

A
  1. Make it mandatory
    => uptake closer to 100%
    => low-risk subsidize high-risk
  2. Bundle with prop insurance
    => offer opt-in v opt-out to improve uptake
  3. Risk-based pricing
    => incentivizes risk management => increase affordability
  4. Gov invests in infrastructures
    => decreases potential losses => increases affordability
51
Q

Identify 2 policy conditions to discourage development in a flood-prone area.

A
  1. Require flood protection for policy activation
  2. Large risk-based deductibles

Exam 6C - F2022 (58 decks)

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