IBC.Flood2019 Flashcards

1
Q

Identify the 6 principles for the financial management of flood risk.
(SEA-FOI)

A
  1. Shield the taxpayer
  2. Efficiency
  3. Affordability
  4. Financially sustainable
  5. Optimal compensation
  6. Inclusivity
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2
Q

Briefly describe the “shield the taxpayer” principle.

A

Reduces taxpayer-funded subsidies by encouraging private insurance market.

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3
Q

Briefly describe the “efficiency” principle.

A

Should be risk-based to incentivize risk mitigation among stakeholders.

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4
Q

Briefly describe the “affordability” principle.

A

Ensures maximum participation by high-risk insureds.

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5
Q

Briefly describe the “financially sustainable” principle.

A

Reduce systemic losses to support sustainability.

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6
Q

Briefly describe the “optimal compensation” principle.

A

Insurance should be predictable & sufficient to reduce publicly funded disaster assistance.

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7
Q

Briefly describe the “inclusivity” principle.

A

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

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8
Q

Identify the 3 prongs in Canada’s flood disaster risk reduction approach.
(AMI)

A
  1. Elevate risk AWARENESS / engagement
  2. Aggressively MITIGATE risk
  3. Improve risk IDENTIFICATION
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9
Q

Briefly describe the risk awareness prong.

A

Convey risk-assessment information to all participants during property development, transaction, financing and insurance processes.

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10
Q

Briefly describe the risk identification prong.

A

Continuously updated public-facing risk maps.

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11
Q

Briefly describe the risk mitigation prong. (2 elements)

A

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

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12
Q

Describe the whole-of-society approach to financial management of flood risk and disaster risk reduction.

A
  • Leverage gov partnerships in infrastructures to reduce climate risk in most exposed regions.
  • Elevate risk awareness among consumers and businesses.
  • Incentivize de-risking efforts among consumers and businesses
  • Enable insurers to introduce new products and premium structures to encourage responsible behaviours.
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13
Q

What is the overall goal of the 2019 IBC Flood reading?

A

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

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14
Q

Identify the 3 options for the financial management of floods.

A
  1. Pure market solution (risk borne by homeowners)
  2. Evolved Status Quo (risk borne by blend of homeowners and gov through DFA)
  3. High-risk flood insurance pool (risk borne by blend of homeowners and gov through capitalization, not DFA)
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15
Q

In the pure market solution to flood risk, identify the 3 homeowners’ choices.

A
  1. Self-insure
  2. Purchase private insurance
  3. Relocate out of flood prone area
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16
Q

In the pure market solution to flood risk, does DFA play a role?

A

Government DFA programs provide no coverage.

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17
Q

In the pure market solution to flood risk, describe the 3 implications of risk-based premiums.

A
  1. Premiums would initially be unaffordable for many.
  2. Gov infrastructures development and buyouts of high-risk properties over time would lower costs and improve affordability.
  3. Gov could also introduce means-tested subsidies to increase participation rates.
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18
Q

Describe the international experience on the pure market solution to flood risk.

A

AUSTRALIA: participation rates are low among high-risk properties due to high costs.

GERMANY: gov was pressured into providing disaster assistance after major floods despite stated policy.

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19
Q

True or False?
In the evolved status quo solution, premiums are risk-based.

A

True.
Private insurance premiums are risk-based (private insurers accept flood risk according to their risk appetite)

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20
Q

Describe DFA involvement in compensation in the evolved status quo solution.

A

Gov DFA programs provide some coverage (specifically to uninsured high-risk properties where coverage is unaffordable)
Provincial DFA programs vary greatly among provinces so DFA compensation is not predictable.

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21
Q

In the evolved status quo solution, does DFA incentivize HOMEOWNERS to engage in risk mitigation?

A

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

22
Q

In the evolved status quo solution, does DFA incentivize GOVERNMENT to engage in risk mitigation?

A

Yes and risk mitigation by gov broadly lowers risk so private insurance can then accept most/all risks.

23
Q

Describe the international experience for the evolved status quo solution.

A

US & Mexico: Gov reduces exposure by transferring some of the risk to global reinsurance.

24
Q

Identify the purpose of high-risk pool solution to flood risk.

A

Build a high-risk flood pool of properties that would not otherwise be offered affordable insurance.

25
Q

Describe the administration & governance in the high-risk flood insurance pool solution.

A

Shared public-private partnership:
Administered by insurance industry
Governed/guaranteed by gov/global reinsurance market

26
Q

What are the 4 operational elements of a high-risk flood pool?

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 forward it to the pool.
  3. Insurer collects premiums & remits to the pool (provides source of capital to pool)
  4. Other cap sources: gov, homeowners levies, municipal prop tax levies.
27
Q

In the high-risk pool solution, are all premiums risk-based?

A

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

28
Q

Evaluate Option 1 against the 6 principles.

(Hint: 3-1-2)

A

2 - Since premiums are risk-based, premium for high-risk residential prop owners are likely UNAFFORDABLE, thus NOT INCLUSIVE.

3- But risk-based premium makes this option EFFICIENT and FINANCIALLY SUSTAINABLE.
Since DFA provides no coverage, taxpayers are SHIELDED.

1- Compensation may not be sufficient, thus this option would likely have SUB-OPTIMAL COMPENSATION.

29
Q

Evaluate Option 2 against the 6 principles.

(Hint: 1-2-3)

A

Overall, this option if considered AFFORDABLE.

Mixture of risk-based premium and variability in prov DFA makes this option INEFFICIENT, having SUB-OPTIMAL COMPENSATION and does NOT SHIELD taxpayers (since DFA is funded by taxpayers).

In addition, the mixture makes the option NOT FULLY INCLUSIVE (insurers accept some of risks but not all) and NOT FULLY SUSTAINABLE FINANCIALLY (since DFA not supported by risk-based premiums).

30
Q

Evaluate Option 3 against the 6 principles.

(Hint: 3-3-0)

A

AFFORDABLE coverage is provided for all high-risk homeowners in Canada.
All homeowners are covered (either by insurance or pool), thus INCLUSIVE.
OPTIMAL COMPENSATION (predictable and sufficient).

EFFICIENCY can vary.
Taxpayer is NOT FULLY SHIELDED if gov contributes to capitalization.
NOT FULLY SUSTAINABLE by premium (capitalization beyond premium may be required).

31
Q

Place the 3 options in order of performance.

A
  1. Option 3 is the best
  2. Option 1 is in the middle
  3. Option 2 is the worst
32
Q

Identify the 2 stages of capitalization necessary with the creation of high-risk pool.

A
  1. Initial capitalization
  2. Low-maintenance capitalization
33
Q

Describe stage 1 capitalization for a high-risk flood pool.

A

The pool initially requires outside capitalization over a transition period before becoming self-sufficient from premiums.

Capitalization comes from: gov contributions, levies on HO and municipal taxpayers.

Contributions are temporary until the pool becomes fully capitalized.

During the temporary period, gov could pay all incoming claims (to limit draw-down on pool capital).

34
Q

Describe stage 2 capitalization for a high-risk flood pool.

A

The pool requires ongoing low-maintenance capitalization to offset subsidies from capping premiums.

Capital can come from: gov contributions, levies on HO and municipal taxpayers.

35
Q

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

A

Reduce subsidies for high-risk insureds by offering lower-priced policies with lower limits and/or higher deductibles.

36
Q

What does DFAA stand for?

A

Disaster Financial Assistance Arrangements

37
Q

About ___ of the costs of overland flooding is for rebuilding infrastructures with the remaining ___ for compensation of residual losses.

A

90% for rebuilding
10% for compensation

38
Q

What are the 3 types of overland flooding?

A
  1. Fluvial / floodplain: when a river overflow its banks
  2. Pluvial/urban: when heavy rainfall overwhelms urbain drainage systems
  3. Coastal: when a storm surge flood coastal areas
39
Q

What is the easiest type of overland flood to model?

A

Fluvial / floodplain flooding because it is correlated with topography.

40
Q

What proportion of Canadians now have coverage for overland flooding?

A

34%

(roughly 1/3)

41
Q

Identify the 4 preconditions for strong flood risk management.
(AIM$)

A
  1. AWARENESS among policyholders of risk, risk mitigation, financial management of flood risk.
  2. INFRASTRUCTURE (levies, sewers,…)
  3. MAPS of flood risks for planning and management.
  4. $ (gov compensation should be limited to incentivize risk mitigation among policyholders)
42
Q

Briefly describe DFAA in Canada.

A

Provincial gov have responsibility for disaster management.

Federal DFAA program reimburses provinces for some of their disaster response costs.

43
Q

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

A

Requires that damage was due to an event that could not be insured.

44
Q

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

A

Ontario may still cover what are considered essential losses even if appropriate insurance was available to the homeowners.

45
Q

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

A

Because it is too expensive.

Australia has a risk-based private market.

46
Q

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

A

Public (and has been trying unsuccessfully to transition to a risk-based funding model)

47
Q

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

A

Mitigation because a large portion of the country is at significant flood risks.

The goal is to transition all communities to risk levels that are insurable.

48
Q

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

A

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

49
Q

Identify a key strength and key weakness of Option 1.

A

STRENGTH: Efficiency in leveraging market incentives to encourage de-risking behaviours.
WEAKNESS: Potential for property owners to avoid being subject to these incentives.

50
Q

Identify a key strength and key weakness of Option 2.

A

STRENGTH: Simplest to implement as it does not require any major changes to the current system.
WEAKNESS: Expensive and not fiscally sustainable.

51
Q

Identify a key strength and key weakness of Option 3.

A

STRENGTH: Allows for a transition to building more climate resilient communities.
Promotes risk-sharing among HO, private insurers and all levels of gov.
Delivers insurance payments instead of public assistance.
WEAKNESS: Setup and operation of the pool is expensive and may take many years because of negotiations required.