UK system - transition to a RSP

jc2018

It says that because the original system was unsustainable, it would move to a system where companies can cede to RSP and that this pool would be funded by a levy put on everybody and those in high-risk are only charged a capped maximum premium.

Can you confirm if my understanding is correct?

1. Previously, two houses with exact same characteristics except the flood risk paid same premiums (500$); however, under the new system, assuming capped max prem is 700$, A (low flood risk) would pay 200$ +50$ levy and B (high flood risk) would pay who should pay 800$ under risk-based pricing pays 700$ + 50$ levy. So even though the flood loss is spread amongst all policyholders, those in low-risk zones are less penalized than before.
2. Flood-re is similar to Alberta Grid Pool
3. If asked a question on whether UK system is a good solution, could I say something like "overall yes for the following reasons ....... ; however, there would still be concerns on the level of the government investment on infrastructure as this had been promised several times through several amendements but was still not provided at a sufficient level."?

I also have a quick question regarding the reinsurance part on page 16, 2nd column.
It says that "Flood Re will also purchase reinsurance to cover losses up to a 1-in-200-year flood event level - and participating insurer will not be liable for losses beyond this level".
Does this mean that insurers will cover a loss that is 1-in-50-year level or 1-in-300-year level? Also, how is this even distinguished? Clearly, there are floods more often than every 200 years. Is this by zones? Like, assuming the answer to my previous question is the latter, if there was a flood in Manchester city in 2010 and again in 2020, Flood Re would not cover that loss, but if there was no flood in London in the last 300 years and it flooded in 2020, Flood Re would cover it and not the reinsurer?

Thank you,

graham

Confirming your understanding:

1. It's a great idea to make up a numerical example to aid your understanding. I think your example is correct in spirit, but I can't say for sure that it works exactly like that since the reading doesn't provide specific information. The main idea is after the transition, there would be greater emphasis on risk-based pricing, so the low-risk person would likely benefit more even they are charged a levy so that the high-risk person can have their premium capped at less than actuarially sound, but affordable rates.
2. I agree that UK Flood Re is similar to AB Grid RSP.
3. I agree with your proposed answer about the UK system. Of course, it depends on the reasons you provide (like very high uptake), and you're right that it's good to point out the shortcomings like under-investment in infrastructure. Basically the examiners would want to see that you understand the UK system and be able to justify that it's a good model for Canada.

About your reinsurance question:

• You are taking the terminology of "1-in-N-year" flood too literally. This is just a shorthand way of describing a probability distribution. When they talk about a 1-in-200-year flood, they are talking about a specific water level in the river or lake or whatever. It would mean that a flood of that level has a probability of 1/200 or 0.5% of occurring. (That distribution would be based on historical data, possibly adjusted for climate trends.)
• Buying 1-in-200-year flood reinsurance means that reinsurance would cover any flood that was deemed to have only 0.5% of occurring. That means that a 1-in-50-year flood would not be covered but that a 1-in-300-year flood would be covered.