Canada is the only G8 country without a residential flood risk management program for overland flooding. (This is due to concerns over adverse selection.) Here, we examine international best practices for ideas on how to create a flood program for Canada. This is a nicely written paper!
It might seem like a good idea to fund a national flood insurance program for OVERLAND FLOODING entirely through general taxation – so everyone would be automatically covered (as with health care). But can you think of a reason that this type of universal coverage might NOT translate well to flood insurance?
Based on past exams, the main things you need to know (in rough order of importance) are:
- why overland flooding isn't covered
- preconditions for a strong flood risk management program [Hint: maps.IA$]
- government role in supporting private flood insurance
- analyze & evaluate different flood management options
- why insurers sometimes cover uninsured floods
- there are also many other good potential exam questions that have not been tested because this paper is relatively new
Note that (2017.Fall #9) & (2016.Fall #8) were practically the same.
Important: Questions from 2016.Spring and prior are from the old flood reading. It's totally different, so don't spend too much time (if any) on those old questions.
In Plain English!
Old Version of Flood Paper vs New Version
Flood insurance has been part of the Exam 6-Canada syllabus for many years, but the CURRENT version of the paper (put out by IBC) was introduced only in 2016.Fall. There is overlap between these two versions, but it's unclear whether the nature of the exam problems will change. All old exam questions are available in the BattleCards, and, of course, in the examiner's reports.
The Big Picture
For me, this paper is all about asking & answering these questions:
- Why doesn't Canada have a flood insurance program? (fears of adverse selection - only people in flood-prone areas would buy it)
- Why does it matter? (climate change & trends like population growth make flood events more devastating)
- What can we do about it? (Look at what the other G8 countries have done)
The paper is not conceptually difficult, but it does require you to memorize quite a few lists, such as preconditions for a strong flood risk management culture. The answer to that is:
- need flood maps (for planning & risk management)
- good Infrastructure (levies, sewers)
- policy holder Awareness of risk, methods of risk mitigation, and financial managment for floods
- Incentives for individual risk management (by limiting Govt $s for compensation)
Note that in the BattleCards, the mnemonic hint for remembering this list is: maps.IA$ where
- maps = flood maps
- I = Infrastructure
- A = Awareness
- $ = incentivize policyholder by limiting Govt $s for compensation
I hope that helps. (You should make up your own hints if mine aren't meaningful to you.)
Other than a silly little example in the middle of the paper called 'The Arithmetic of Flood Insurance Premiums', there are no actual examples of pricing flood insurance. BUT, the CAS seems to be introducing flood pricing questions to Exam 6 (as a form of Bloom's Taxonomy?) (2017.Spring #10), (2016.Spring #11b)
There is no template for this type of question – you have to figure it out based on your general knowledge of pricing applied to the given flood data. Good pricing concepts to keep in mind are affordability, availability, and sustainability, if you're asked to evaluate alternatives. It is particularly important here to study the examiner's reports for these calculation questions.
Section 1: Introduction
The introduction covers a range of important issues related to flooding such as:
Reasons for non-coverage of OVERLAND flooding: (Hint: adverse.under.maps)
- adverse means fears of adverse selection
- under means Govt under-investment in risk planning/mitigation
- maps means lack of effective flood hazard maps
Then there are 4 examples of government underinvestment in risk planning (Hint: BAIL me out!!)
- Building codes are obsolete
- Asset management is poor
- Infrastructure is lacking
- Land use planning is inadequate
These are just 2 of the lists you'll have to memorize. (They aren't hard to understand, but will take time & effort to get them into your head.) This introductory section then goes on to discuss such items as preconditions for a strong flood risk management culture (see Big Picture above), trends that make flood risk management difficult, causes of floods, types of floods, and so on...
Will the CAS actually ask questions at this level of detail?? Based on past exams, the answer is YES!!! The Flood paper, along with Agriculture (Chevalier) and Earthquake (OSFI) are tested in GREAT detail. Those 3 papers are probably the most difficult in terms the sheer number of facts that must be memorized. Study the BattleCards relentlessly!
Section 2: Case Studies
I find these case studies very interesting. Pay particular attention to the overview of approaches among G8 countries. (See table on p13 of the paper.) To make sense of that table, you need to first understand how it's organized in terms of categories of approaches:
- model: public / private
- purchase: mandatory / voluntary
- package: bundled / optional
- pricing: Govt-mandated / risk-based pricing
- subsidies: policyholder / taxes
- Govt role: insurer / enabler
The menmonic device I use here is: m(pur.pak.price)sGov, where m = model, s = type of subsidy, and the other abbreviations, (pur.pak.price) & Gov, are self-explanatory.
The UK system: The UK system is offered as the best model for Canada. With respect to the categories listed above, the UK model is:
- private | voluntary | bundled | risk-based pricing | policyholder | enabler (mitigation, mapping, zoning)
The uptake is 95%, which is the highest among G8 countries. This is likely because the U.K. automatically bundles flood with homeowners. (Flood is mandatory, but you have to opt-out if you don't want it, and most people probably don't even think about when they buy their homeowners policy.) Learn the UK model!
Concept: As already noted, a major problem with offering private flood insurance for OVERLAND flooding is adverse selection. (Only those living in flood-prone areas would buy it, but then it would not be affordable because the risk is not spread.)
- Question: How can we deal with this KEY problem?
- Answer: Either make purchase of flood insurance mandatory OR bundle flood coverage with the standard HO policy. (This ensures that low & medium-risk insured participate, which spreads the risk & lowers the cost. The UK has chosen the bundling option, and does so automatically. That means you have to opt-out if you don't want it, but most people don't opt-out.)
IBC's flood paper also goes into great detail on the historical development of the UK program, but that's probably more than you need. The important thing is to know how their program currently works, and that it is a good model for Canada.
Section 3: Best Practices
Much of this final section discusses the role of private insurers & the role of the Govt in providing flood insurance. (Covered in BattleCards) The policyholder also has a role in terms of purchasing a policy, and taking reasonable steps to mitigate risk.
- Here's a mini-pop-quiz: If you were going to build a chicken-coop next to a flood-prone river, would you build it at ground level, or put it on stilts to mitigate risk?
- Answer (trick): Both options are dumb. To mitigate risk, build it on a hill FAR AWAY from the river!
Don't forget to check out the simple flood simulator mentioned near the beginning of this wiki article. Compare that to the 2 calculation problems from previous exams that are given in the next mini BattleQuiz. - a simple Excel flood management simulator (click to download then open in Excel)
- There are too many memory items to list here. Some of them are discussed above, and the rest are covered in the BattleCards.
- Why has flood insurance suddenly become such a big deal? (climate change, population growth)
- What can Canada do about it? (create a flood insurance framework to address availability, affordability, and sustainability)
- How can Canada do it? (look to other G8 countries, especially the UK - they have 95% uptake - fantastic!)
- USE THE EXAMINER'S REPORTS for: (2017.Spring #10), (2016.Spring #11b)
- Work through these problems several times over your course of study.
- They are hard, and the goal on exam-day is to rely as much as possible on your knowledge of old exam problems.
- If a flood pricing question appears on your exam, you want to be able to model it on a problem you already know THEN make any necessary adjustments.
- If you have to figure everything out from scratch, you will NOT have enough time. (Plus, you'll go bonkers. Bad!)
You can expect roughly 2-3 pts on flood insurance on the exam
POP QUIZ ANSWERS
Universal coverage might not translate well to flood insurance for a variety of reasons:
- Unlike with health care, which everyone needs at some point, OVERLAND FLOODING is a real risk for only a small subset of the population. (The public might not think it's fair to subsidize this subset.)
- "Free" coverage for this type of flooding may reduce incentives for landowners to mitigate flood risks. (Ex: Do not build in a flood-prone area.)