Flood Insurance

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Flood Insurance

Need to Know:

Why overland insurance isn't covered

Preconditions for strong flood management

Options flood insurance

Government role in supporting flood inrance

IBC Flood

3 key reasons explaining why overland flood insurance is not available for residential

Adverse Selection:

can't apply basic insurance principle of diversification through risk pooling.

flood insurance is hard to offer and, when available, it is naturally expensive.

Under-investment in public infrastructure, poor asset management

obsolete building codes

ineffective land-use planning.

lack of effective flood hazard maps

4 preconditions that are essential to establishing a strong flood risk management culture.

accurate and up-to-date flood hazard mapping

asset management, urban planning and flood risk management;

ongoing and adequate investment in flood defences, and sewer and stormwater infrastructure;

widespread awareness of flood risk

sound understanding by all stakeholders – including governments, communities and individuals – of the physical and financial consequences of flood risk and the tools available to ensure Canadians are prepared;

limited recourse to government revenue to finance post-disaster compensation

individuals face effective risk-mitigation incentives

the financial burden on taxpayers is minimized.

Weather

Over the past 60 years, average temperatures in Canada have increased by more than 1.3°C – about twice the global average.

with an average 12% increase in rainfall across the country.

more violent, extreme weather patterns, including storms and floods. (increased in frequency by a factor of 20)

represents almost 40% of all natural disasters ever recorded in Canada.

Flood Set 1

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The financial management of flood risk is increasingly problematic due to the combination of several trends:

the growth in population and asset values,

the concentration of urban and industrial development in flood-prone areas,

the onset of more violent weather patterns,

the increase in the vulnerability of private structures and public infrastructure due to obsolete building codes

under-investment in risk mitigation measures.

5 main underlying hazards that can generate overland floods:

Spring snow-melt runoff

Storm rainfall

Tidal flooding – a combination of low-pressure weather systems and peak high tides can raise water levels in rivers, lakes and oceans to the point where water defences are breached

Natural dam failure – the sudden release of water flow resulting from the failure of temporary natural dams caused by ice buildup (i.e., ice jams), landslides, moraines and glaciers

Structural failure – the sudden release of water flow resulting from the failure of man-made engineered flood defences and water control infrastructure (e.g., dams, levees, dikes)

3 main types of floods based on location:

Fluvial (i.e., riverine) flooding – occurring when, in the flood plains of a river

Urban (i.e., pluvial) flooding – occurring when, in an urban centre, surface and underground infrastructure is unable to drain excess water flow

Coastal flooding (i.e., storm surge) – generated by the combined action of wind, waves and high tides – including the effect of tsunamis

Flood Coverage:

residential coverage for overland flooding is not yet available (Sewer back up is available (Qc: seepage and rising water table)

Automobile and Commercial property: overland flooding is covered

Reasons Insurers often end up paying for a significant portion of associated losses.

often two different perils: one covered by the policy (e.g., sewer backup) and one excluded from coverage (e.g., overland flooding)

to avoid reputational damage and potential political pressures.

Why is flood not insurable?

Insurance works well for :

random,

uncertain risks

not correlated.

Flood risk is the opposite:

it is easily predictable: the same properties on the same flood plain tend to flood at periodic

affects a large pool of properties at the same time.

predictability leads to adverse selection

lead to high – often unaffordable or non-commercially-viable

a significant portion of flood-related losses is directly attributable to

under-investment in public infrastructure,

poor asset management plans,

obsolete building codes

ineffective land use planning

Flood Set 2

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3 consequences of the predictability of flooding

Adverse Selection

A significant portion of the losses are related to the lack of infrastructure and investment

flood mapping in Canada is inadequate

The Arithmetic of Flood Insurance Premiums

Property value $500,000

1-in-50 year floodplain

damage: 25% of the property value

500 K * 0.25% * 1/50 =125,000 =$2,500 a year for flood coverage

Why is the risk-based premium for flood so expensive?

all properties are affected at the same time, reducing the diversification benefit.

Consequence of the limited insurability of flood risk in Canada

it places the burden on homeowners and taxpayers who are funding disaster relief spending from federal, provincial and municipal governments.

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3 approaches of flood insurance:

fully private,

fully public

in between;

Type of Insurance:

voluntary

mandatory;

Insurance Product:

on its own

part of a bundle of several types of coverage.

Financial management of flood risk can be categorized based on six variables:

Private vs. publicly administered programs

Voluntary vs. mandatory insurance take-up

Optional vs. bundled coverage

Risk-based vs. government mandated pricing

Policyholder-funded vs. taxpayer-funded subsidization of high-risk properties (or neither)

Government as insurer vs. enabler of insurance

Private models are

market-based,

with government intervention

limited to investment in risk assessment and risk mitigation initiatives

risk-based.

Public models are

government involvement in the provision, funding and design of flood insurance.

governments set prices and terms of coverage

more akin to a social assistance program than to insurance.

Ibc Fmfr Report V Print 02 En.Indd (application/pdf)

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UK Flood Insurance

UK Flood Insurance

private market system,

Government is an enabler of insurance

by providing basic flood mapping,

adequate flood control infrastructure

stringent land use planning.

Consumers play their part

by paying risk-based premiums

by investing in risk mitigation measures to maintain insurability.

Flood Re

Goal

sustainability

to ensure availability and affordability to high-risk properties

to enable a sustainable transition to a risk-based pricing environment over the planned 25-year existence of the Flood Re pool.

How it works

targets only high-risk properties identified through a mapping

risk sharing pool,

supported by a government commitment to backstop excess losses,

operated and financed by insurers as a not-for-profit fund to subsidize flood coverage for high-risk properties.

Homes built after 2009 excluded to avoid encouraging unwise building in high-risk areas

if premium > price ceiling, the consumer is charged only the capped price. The insurer then cedes that policy

If premium <= price ceiling, the insurer may choose to retain that policy.

How is affordability maintained

sets out price ceilings for eligible (high-risk) flood insurance policies.

How does Flood Re mitigate that they are running at a loss.

topped up through additional income from a levy charged to policyholders

purchase reinsurance to cover losses up to a 1-in-200-year flood event level

The role of government will remain limited to:

Setting the price ceilings for flood coverage, which are anticipated to increase over time;

Providing financial support in the event of extraordinary catastrophic losses exceeding the capacity of the pool;

Investing in new and improved flood defence

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Role of Insurance

Role for insurance

Advantages over government

insurance seeks to fully compensate consumers by restoring them to their pre-disaster position.

create a strong incentive for consumers to undertake risk reduction measures (while government relief programs typically encourage risky behaviour)

Role of the Insurance

U/W: High vs low risk

Pricing: Risk-based pricing

Educate p/h regarding risk management, financial, risk mitigating

pay covered losses in a timely manner

Low take-up of flood insurance

Reason for the failure or fallibility of models: Adverse selection as risk-based premiums tend to be unaffordable (especially true for opt. cov)

Remedies:

bundle

downsides with bundled coverage: low-risk consumers subsidize high-risk ones

Advantages: protect low-risk consumers when there are affected by flood disaster which the probability is increasing

Germany high rate of take-up can be achieved if there is a well-designed system of incentives supported by a sound risk management culture.

actuarially sound rates

government relief programs do not discourage the uptake of private insurance coverage

Role of Government

Role of Government: provide appropriate conditions to manage flood risk

Promoting risk mitigation

direct investment in infrastructure

implementation of early warning systems

strict enforcement of zoning, land use planning and floodplain development regulation;

Increasing public education and awareness

Addressing the issue of high-risk properties

subsidize unaffordable price, or

financial relief programs

sound risk assessment platform through up-to-date flood maps , data availability

Why is government still need to provide flood relief?

Insurance has coverage limit which are exceeded during disasters

subsidize high risk profile which are not insurable

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Flood Insurance in Canada

Why is Canada not offering Flood Insurance?

already cover water related damage (number 1 cause of home losses)

sewer backup,

overland flooding, through automobile and commercial property policies.

simply having a flood insurance program is not enough.

many not financially sustainable.

enable compensation but at a cost that may be unaffordable to some. Affordability for all consumers, including those at highest risk, comes at a cost.

2014 Economic Action Plan

National Disaster Mitigation Program (NDMP).

Objective of the NDMP

proactive approach to disaster risk management (identify and mitigate the impacts of floods)

to reduce the impact of natural catastrophes on Canadians. I

new investment for disaster protection and mitigation initiatives

consistent with Public Safety Canada’s all hazards approach to emergency management, which sees prevention and mitigation activities

aimed at eliminating or reducing the risks of disasters to protect lives, property and the environment, and reduce economic disruption.

construction of floodways and dikes,

nonstructural measures,

building codes,

land-use planning

insurance incentives.