IBC - Flood

Question 1

What are the preconditions for strong Flood Risk Management culture? (4)

Answer 1

• need FLOOD MAPS
• good INFRASTRUCTURE
• policyholder AWARENESS of risk, method of risk mitigation and financial management for flood
• INCENTIVE for individual risk management

Question 2

What are the reasons for non-coverage of OVERLAND flooding? (3)

Answer 2

• fears of ADVERSE selection
• government UNDERINVESTMENT in risk planning and mitigation
• lack of effective flood hazard MAPS

Question 3

List 4 examples of government underinvestment in risk planning.

Answer 3

• building codes are obsolete
• asset management is poor
• infrastructure is lacking
• land use planning is inadequate

Question 4

Why do insurers often cover uninsured floods?

Answer 4

• 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

Question 5

How is the weather changing in Canada?

Answer 5

In the past 60 years:

• TEMPERATURE has increase by 1.3C, which double the global average
• RAINFALL has increased an average of 12%

Question 6

What are some trends that are making financial management of floods difficult? (5)

Answer 6

• GROWTH of population, density, and asset values
• CONCENTRATED development in flood-prone areas
• severe WEATHER
• vulnerability due to obsolete BUILDING codes
• UNDERINVESTMENT

Question 7

What is the availability of flood coverage?

Answer 7

Residential:
- overland flooding: no
- sewer: yes, but by endorsement
Auto, commercial:
overland flooding: yes

Question 8

Why is overland flooding not insurable?

Answer 8

• 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

Question 9

What are the categories for international flood management approaches? (6) (hint: MPPPSG)

Answer 9

• 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

Question 10

Describe the flood insurance program in the UK with respect to the 6 variables.

Answer 10

• 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%

Question 11

UK flood insurance - Purpose (3)

Answer 11

• sustainability
• maintain AA (affordability and availability)
• 25 years transition to full private risk-based pricing

Question 12

UK flood insurance - How does it work? (2+2)

Answer 12

• 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

Question 13

UK flood insurance - How is affordability ensured?

Answer 13

Through price ceilings.

Question 14

UK flood insurance - What is the role of the government?

Answer 14

They set the price ceilings, provide financial relief for CATs exceeding the pool capacity, and invest in infrastructure.

Question 15

Why is having a flood program better than having a governmental disaster relief program? (2)

Answer 15

• 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

Question 16

What is the cause and what are some remedies for the low uptake of flood insurance.

Answer 16

CAUSE: adverse selection
REMEDIES: make the coverage mandatory, or bundle it with other products or perils

Question 17

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

Answer 17

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

Question 18

What is the role of the insurer in private flood insurance? (4)

Answer 18

• 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

Question 19

What is the role of the government in supporting private flood insurance? (4)

Answer 19

• 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

Question 20

Why may the government still need to supplement private flood insurance? (2)

Answer 20

• 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

Question 21

How can flood insurance unaffordability for high-risk customers be addressed? (2)

Answer 21

BUNDLING: bundle flood with standard homeowner’s policy (low-risk customers subsidize the high-risk customers)
SUBSIDIES: the government can provide subsidies through taxation

Question 22

How is Canada starting to address flood management issues?

Answer 22

The 2014 EAP (Economic Action Plan) proposes developing NDMP (National Disaster Mitigation Plan).

Question 23

What are the NDMP objectives? (2)

Answer 23

• a proactive approach to disaster risk management

- to reduce the impact of natural catastrophes on Canadians

Question 24

Identify policy conditions to discourage development in a flood plain. (2)

Answer 24

• require flood protection for policy activation

- large, risk-based deductibles