Swiss Re

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  1. Major federal initiatives related to flood management
    • Flood Damage Reduction Program (1975 to early 2000s): reduce flood losses and prevent loss of life by discouraging development in areas vulnerable to floods
    • further aims of the program were to increase coordination of federal and provincial flood strategies, promote long term flood damage reduction, increase stakeholder awareness of flooding, increase knowledge of location of flood-prone areas
    • initiatives carried out under FDRP include flood forecasting, regional flood frequency analyses, site-specific flood damage reduction planning studies
    • Joint Emergency Preparedness Program (1980 to present): assist local governments in the development of disaster preparedness projects
    • National Disaster Mitigation Strategy (2008 to present): support mitigation, build on current investments, provide method to enhance current piecemeal approach
    • Disaster Financial Assistance Arrangements (1970 to present): provide disaster recovery assistance to those who have sustained disaster damages > $1 per capita
  2. Motivating factors for flood management programs
    • increasing population exacerbated development in unidentified flood prone areas
    • large federal disaster payouts added pressure to manage flooding on a limited budget
    • environmental considerations (preserve green spaces, impact of structural works)
    • concern over transferring funds from general public to the few living in floodplains
    • evidence that structural floods encouraged development in floodplains
    • evidence that government relief programs encouraged development in floodplains
  3. Current Flood Damage Remittance Measures for Homeowners in Canada
    • Government relief
    • available only for uninsurable damages
    • coverage is limited through capping of payouts, deductibles, essential items
    • available only to homeowners, small business, farms and municipal governments
  4. Homeowner insurance coverage for flooding
    • vast majority of insurers do not cover overland or groundwater flooding
    • only type of flood damage covered is sewer backup
  5. Commercial insurance coverage for flooding
    • commercial insurance customers may be able to purchase flood insurance
    • usually excluded from all perils policies, and offered only as an endorsement
    • commercial flood insurance is heavily underwritten and offered only if little known risk
  6. 4 categories of flood insurance models
    • public and bundled (Spain, France)
    • public and optional (United States)
    • private and bundled (UK, Switzerland)
    • private and optional (Germany)
  7. 6 factors necessary for a peril to be insured
    • mutuality: a large number of people must combine to form a risk community
    • need: there must be a need for insurance cover when anticipated event occurs
    • assessability: peril must be assessable in terms of possible losses
    • randomness: event must be independent of will of insured, and time is not predicable
    • economic viability: risk community must be able to cover flood-loss financial needs
    • similarity of threat: risk community must be exposed to the same threat and the occurrence must result in need for funds in the same way for each community member
  8. Optional vs bundled flood insurance coverage
    • adverse selection is a big problem with optional coverage, reducing economic viability for flood coverage (smaller community to draw on)
    • bundled produces very high penetration rate, allowing insurers to spread out risks
    • as long as risk based insurance is provided, bundled is equitable
  9. Unites States (public and optional)
    • based on theory that limiting development in flood prone areas and requiring homeowners to purchase flood insurance would discourage flood vulnerable development
    • objectives were identification of floods hazard areas, mitigation, spread of risk
    • private insurers are directly involved by selling policies, but government sets rates 
    • NFIP, by design, is not actuarially sound because subsidized insurance rates are available to encourage communities to join the program, and premiums are based on average historical loss year, not building reserves above that
    • inherent adverse selection since insurance is optional for those with lower risk
  10. France (public and bundled)
    • Cat.Nat system aims to provide rapid compensation to those affected by natural hazards and promote mitigation and prevention strategies across the country
    • combines both private insurance with a government backstop (public reinsurer)
    • natural hazard (incl. flood) is combined with standard auto, home and business insurance
    • "state of natural catastrophe" must be declared by the Interior Ministry after a disaster 
    • there is no risk differentiation, only a flat % of premium charge
    • system in place has been considered a successful public-private partnership; however it’s not risk based so it doesn’t promote risk mitigation and heavy subsidization from low risks
  11. Germany (private and optional)
    • natural hazard insurance is offered by private insurers as a optional coverage
    • market penetration is high for building insurance (90%) since it’s generally required by banks for loans; natural hazard coverage penetration is low (20%) except high-risk areas
    • major flood in 2002 forced a re-evaluation of the state of flood insurance
  12. United Kingdom (private and bundled)
    • bundle system is applied as part of standard or general home insurance
    • private insurers purchase reinsurance on the international market
    • Gentleman’s Agreement was established between insurers and government in 1961 to loosely define each party’s responsibilities in the partnership
    • those who occupy the 1 in 75 year flood risk area are restricted guaranteed coverage
    • pricing is risk-based, deductible can vary with exposure
    • high penetration (95%) and exclusion of very high risk lead to stable premiums
    • government role: guarantee quality flood maps, adequate flood defence, effective land use
  13. Which model should Canada choose? UK because:
    • bundled approach and option for exclusion of very high risks reduce adverse selection
    • risk based flood insurance pricing
    • partnership approach between insurance industry, governments and private individuals
    • government responsibilities reflect current measures carried out by Canadian government
    • involvement of individuals in flood management through deductibles and mitigation
    • is a private insurance program supported by government flood risk reduction actions
  14. Why flood insurance is necessary in Canada
    • preferred means of providing assistance to homeowners in Canada
    • actuarial, risk based insurance coverage can be more effective and equitable 
    • strong belief in Canadian public that flooding is covered leads to resentment of insurers
    • provides opportunity to better serve their client and remove coverage ambiguity
    • provides opportunity for growth in a mature insurance market
  15. A Proposed Solution for Flood Insurance in Canada
    • cover as many flood types as possible: reduces policyholder confusion, increase satisfaction
    • moral hazard: not mitigating, taking action to increase losses; use price signals
    • risk based pricing: necessary condition to attain economic viability
    • extend to as many low risks as possible through bundling product (avoid adverse selection)
    • exclude high risks: disincentive for development/location in high risk areas, reduce burden on insurance community after large flood, ensure low risk coverage is affordable
  16. Role of insurance industry
    • agree to provide flood coverage to homeowners
    • ensure that price reflects risk assumed, and use risk based deductibles
    • keep track of flood risk changes
    • communicate flood risk reduction info to policyholders as well as coverage characteristics
  17. Role of the governments
    • zone for flood risk and ensure that new development is not located in flood-prone areas
    • aim for comprehensive flood hazard identification, like expanding and updating maps
    • work to reduce flood risk for Canadian homeowners
    • ensure government relief programs do not conflict with insurance coverage and payouts
    • flood rates should not be regulated
  18. Role of homeowners
    • participate in flood losses, through retention of some costs
    • participate in flood damage mitigation measures on their own property
    • consistently communicate with insurance providers when improvements are made
  19. First steps for implementation
    • dialogue between the insurance industry and governments, initiated by IBC
    • development of actuarial costing analyses may be required
    • hold industry forum to discuss the basic issues regarding flood insurance in Canada
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Swiss Re
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