IBC - Flood 2019

Question 1

Overall goal of 2019 reading

Answer 1

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

Question 2

Principles for the financial management of flood risk (6)

Answer 2

Shield the taxpayer
Efficiency
Affordability 
Financial sustainability 
Optimal compensation 
Inclusivity

Question 3

Define shield the taxpayer

Answer 3

Reduce taxpayer funded subsidies by encouraging private insurers market

Question 4

Define Efficiency principle for financial management of flood risk

Answer 4

Rates should be risk based to incentivize risk mitigation among stakeholders

Question 5

Define affordability principle for financial management of flood risk

Answer 5

Ensures maximum participation by high risk insureds

Question 6

Define financial sustainability principle for financial management of flood risk

Answer 6

Reduce systemic losses to support sustainability

Question 7

Define optimal compensation principle of financial management of flood risk

Answer 7

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

Question 8

Define inclusivity principle of financial management of flood risk

Answer 8

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

Question 9

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

Answer 9

Elevate risk awareness/engagement
Improve risk identification
Aggressively mitigate risk

Question 10

Describe elevate risk awareness/engagement

Answer 10

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

Question 11

Describe ‘improve risk identification’

Answer 11

Continuously updated public facing risk maps

Question 12

Describe ‘aggressively mitigate risk’

Answer 12

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

Question 13

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

Answer 13

• 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

Question 14

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

Answer 14

• 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

Question 15

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

Answer 15

-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

Question 16

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

Answer 16

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

Question 17

Options for financial management of floods

Answer 17

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)

Question 18

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

Answer 18

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

Question 19

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

Answer 19

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

Question 20

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

Answer 20

• 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

Question 21

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

Answer 21

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

Question 22

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

Answer 22

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

Question 23

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

Answer 23

• 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

Question 24

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

Answer 24

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

Question 25

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

Answer 25

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

Question 26

Describe the international experience for: Evolved Status Quo solution.

Answer 26

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

Question 27

Identify the purpose for: High-Risk Pool solution.

Answer 27

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

Question 28

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

Answer 28

- administration by the insurance industry | - governed and guaranteed by government/global reinsurance market

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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

Question 31

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

Answer 31

Step 1: initial capitalization | Step 2: low-maintenance capitalization

Question 32

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

Answer 32

- 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)

Question 33

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

Answer 33

- 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

Question 34

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

Answer 34

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.

Question 35

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

Answer 35

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

Question 36

Types of overland flooding (3)

Answer 36

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

Question 37

What is the easiest type of overland flooding to model?

Answer 37

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

Question 38

What proportion of Canadians now have coverage for overland flooding?

Answer 38

Approximately 1 in 3.

Question 39

Preconditions for strong flood risk management. (4)

Answer 39

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

Question 40

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

Answer 40

- provincial governments have a responsibility for disaster management - the federal DFAA program reimburses provinces for some of the disaster response costs

Question 41

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

Answer 41

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

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

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

Answer 44

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

Question 45

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

Answer 45

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

Question 46

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

Answer 46

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

Question 47

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

Answer 47

- 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).

Question 48

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

Answer 48

- 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

Question 49

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

Answer 49

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.