IBC.Flood2016

Important Information Added July 7, 2021:   See Study Tips for IBC.2019 for more information.

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!   Forum

Pop Quiz

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?

BattleTable

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: AIM$  ← shout-out to RL!]
• 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.

Top Questions ← Questions you absolutely need to know!

Questions held out from Fall 2019 exam: #11. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #9)	bundling: - advantages	financial management: - categorization variables	flood risk management: - preconditions
E (2019.Spring #10)	CAS.GovtIns	(i) PACICC.Comp (ii) evaluate IBC flood ins.
E (2018.Fall #11)	pub/priv, mandatory/vol: - advantages/disads	take-up rates: - variables that increase it
E (2018.Spring #9)	financial management: - categorization variables	SCENARIO: - create a flood program
E (2017.Fall #9)	overland flooding: - not covered - why?	flood risk management: - preconditions	flood coverage: - government role
E (2017.Spring #10)	SCENARIO: - flood management options
E (2016.Fall #8)	overland flooding: - not covered - why?	flood risk management: - preconditions	flood coverage: - government role	uninsured floods: sometimes covered - why?
E (2016.Spring #11)	moral hazards: insured, govt	ANALYSIS: create pricing structure	discourage flood plain development
E (2015.Fall #6)	insurability of floods
E (2015.Spring #11)	bundling	UK flood program
E (2015.Spring #15)	outdated: DFAA	outdated: DFAA	outdated: DFAA	outdated: DFAA
E (2014.Fall #10)	govt involvement
E (2013.Fall #14)	bundling	moral hazard: insured	moral hazard: insured, govt
E (2012.Fall #16)	Canada - issues	Canada - solutions	rates, deductibles, eligibility	(d): rates (e): govt involvement

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)

Calculations

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.

SimFlood - a simple Excel flood management simulator (click to download then open in Excel)

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!

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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. If that doesn't work for you, try this memory trick instead. (shout-out to Bastien!)

Question describe the U.K. flood insurance system in terms of the 6 variables

• private
• voluntary
• bundled – automatically bundled in HO polcies
• risk-based pricing – set by private insurers
• policyholder – program is supported mainly by policyholder premiums although some cross-subsidization between low & high-risk insureds may occur
• enabler – government is involved in a support role by providing flood mitigation, flood mapping, building zoning to discourage construction in flood-prone areas

The UK system is offered as the best model for Canada. The uptake is 95%, which is the highest among G8 countries. This is likely because the U.K. automatically bundles flood with homeowners insurance. Note you can opt-out of flood coverage but most people don't even think about that when they buy their homeowners policy. The result is that virtually every homeowner in the U.K. does have flood coverage.

Another flood model closer to home is the U.S. National Flood Insurance Program (NFIP).

Question describe the U.S. flood insurance system in terms of the 6 variables

• public
• voluntary
• optional add-on
• risk-based pricing – government set rates & underwrites policies
• taxpayer – shortfalls are covered by taxpayers
• insurer & enabler – government pays claims but private insurers can still service and underwrite policies

Uptake in the U.S. is only 20-30%. See this forum question for a discussion on pricing in the U.S. system. (shout-out to jaylow!)

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: identify ways of dealing with this problem of adverse selection

• make purchase of flood insurance mandatory
• bundle flood coverage with the standard HO policy – ensures low & medium-risk insureds participate, which spreads the risk & lowers the cost

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.

Here is a link to some further information on the U.S. National Flood Insurance Program. Also, it might be an idea to memorize the table of international flood models from the source reading. (The U.K. and U.S. models are probably the most important.) This table is shown on the lower half of the page in the link below.

International Flood Models (from source text)

(Historically, exam questions on international practices focused on the U.K. but more recently the focus has been on the U.S. model.)

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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. SimFlood - a simple Excel flood management simulator (click to download then open in Excel)

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BattleCodes

Memorize:

• There are too many memory items to list here. Some of them are discussed above, and the rest are covered in the BattleCards.

Conceptual:

• 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!)

Calculational:

• 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

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  Forum

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.)