2017 Spring 10

jc2018jc2018
in IBC.Flood

I got the same numbers as the 5year version calculation, but I'm not sure about the sample answer 3.

It says that out of the three programs, program 3 costs the most but that it costs the least for the government.
Isn't the government paying the following?
1 - 0$ for investment + possibly up to 62.5M$ on relief for uninsured loss = 62.5 million
2 - 100M$ for investment + possibly up to 6.25M$ on relief for uninsured loss = 106.25M$
3 - 150M$ for investment + no relief = 150M$

Or is it automatically assumed that the industry would pay for this one time investment like in sample answer 2 and the UK Flood Re one-time start fee?

Also, if the one-time fee is paid by the government, would it be okay for me to say that even though in 5 year horizon, option 1 costs the least for the government, in longer terms, say 15 years, option 1 cost will triple, making option 3 a better option? (of course, assuming that hypothetically, uptake stays the same and that the floodway still works perfectly without any more investment) I guess I could also include that option 3 would be better than 1 since insurer indemnifies but government only gives basic relief ?

I'm guessing that they just really want to see if we understand the material properly or if we just memorize and regurgitate, but I was wondering how creative answers can be. Like, is using 15 years in my answer a nono since they asked 5year horizon, or is that just a minimum guideline?

Thanks!

Comments

  • grahamgraham

    Sample answers: I notice from time to time that some of the sample answers in the examiner's report are not completely correct. I think they are selected from actual candidate papers as answers that are good, and may have received full credit, but aren't necessarily absolutely perfect. Here, for sample answer 3, I agree with you. I don't see how option 3 costs the least for the government over a 5-year time horizon.

    In this kind of question, where there is no model to follow from the source reading, they should accept a broad range of answers. But there are a few keys to answering this type of question successfully.

    1. Think carefully through the given information. Make sure you understand all of it before trying to do any calculations.
    2. Figure out the key points. In my mind, the key points would be economic cost and social cost. I would consider the participation rate as a factor in social costs because a goal is to have as high a participation rate as possible. (In the answer, they talk about premium cost, but I would have included that as social cost since it affects the individual citizen.)
    3. Then you have to do the calculations for each option. This is the main part of the problem. The calculation boils down to (frequency) x (severity) and then you compare to the government investment in infrastructure. I'm sure there is a simpler way to do it versus making a table like they do in the examiner's report. But however you do it, this is likely where most of the points are.
    4. There is no one correct choice for the best option. I think option 1 is the worst - I don't see how you could justify option 1. But for option 2 or 3, if you can say something half-way intelligent, I think you'd get the points.

    By the way, you should stick closely to the given information. I wouldn't make assumptions about what the government might pay in disaster relief. (If the economics of disaster relief were somewhere else on the syllabus, that would be different, but it isn't.)

    I don't think it would hurt to extrapolate to a 15-year time horizon, but you should keep any comment about that to 1 sentence. Don't do any calculations for that. In general, it's better to stay close to what the problem asks for. You don't have enough time to beyond that. (If you were doing a project at work, then certainly you would consider longer time horizons and probably many other things that are not included in this problem!)

  • cgc2018cgc2018

    Hello, I have another question regarding this question. Do we have to illustrate one -year time horizon and 5-year horizon(or any time horizon), or we do only 5 - year horizon calculation to support our final conclusion?

  • grahamgraham

    Since the problem asked about a 5-year time horizon, you would only have to do the 5-year table. I think the reason they included the 1-year table is that it might be easier to think through 1 year first, then extend the results to 5 years.

    This was a hard problem because there is no clearly defined method for solving it. (Do we consider the cost to the government, cost to the homeowner, cost to the insurer, cost to society?) Just keep in mind that you should try to use the given information, and that the main thing is to calculate the total loss using some form of (frequency) x (severity) and then compare it to the infrastructure cost. I doubt many people were able to reproduce that tables as given in the examiner's report, but you could still probably get most of the points with a simplified calculation. You should say something about the participation rates as well.

    Note that the severity is the same for all options. It is only the frequency that's different. That's the key observation. That, and that the participation rates are different for each option.

  • ChristoRoyerChristoRoyer
    edited February 2023

    I have a question concerning the cost the government is paying.
    By calculating the (Frequency X Severity), we get the premium that needs to be paid to cover the losses in average. Am I right to say this correspond to the total premium paid by those who chose to buy the coverage and not paid by the government?

  • Staff-T1Staff-T1

    yeah the government doesn't pay the premium

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