B21 GOC FLOOD RISKS

Emergency Management Strategy (EMS) → Priority Areas

CUFES

• Collaboration to strengthen resilience

• Understanding of disaster risks in all sectors of society

• Focus on disaster prevention & mitigation

• Enhance disaster response capacity & development of new capabilities

• Strengthen recovery efforts

Flood Risk → Inc in Freq & Sev

Freq → inc in extreme precipitation due to climate change

Sev → development in floodplains

Flood Risk → 2 Key Drivers

Pop growth & urban development

• Densification/development of flood-prone areas

• Assets concentrated there

Climate Change

• Warmer temp inc precipitation

• Extreme weather events

• Rising sea levels

Pluvial Flooding

Caused by extreme rainfall

Fluvial Flooding

River & ponds overflow

Problems w/ Flood Insurance

High cost of insurance

• Cost-prohibitive in high-risk areas

• Esp for low-income households

Low risk awareness

• Didn’t know flood risk or assume it’s already included

• Don’t purchase flood covg or not enough

• Don’t invest in property-level protections

Misaligned Incentives

• No incentives for homeowners to reduce risk or purchase insurance

• Local gov approve land use that inc flood risk → rewarded w/ inc property sales prices & tax revenue

• Gov provide free post disaster relief

Traditional Approach vs Flood Risk Management (FRM)

Traditionally → gov build expensive structural controls

• Separate ppl & property from sources of flooding

FRM → shares responsibility of flood risk across many stakeholders

• Promotes non-structural mitigation to complement other types of mitigation

FRM Responsibilities → Federal Gov

• Supporting local efforts to prepare/respond to flood disasters

• Providing financial assistance to provincial govs

• Monitor contributors to flood risk

FRM Responsibilities → Provincial Gov

• Set regulations / policies on land use

• Regulate insurance sector

• Oversee municipalities

• Request federal assistance when needed

FRM Responsibilities → Insurance Industry

• Transfer flood risk from homeowners to insurers

• Data collection & research

• Incentivize policyholders to reduce risk by charging risk-based prem

4 Preconditions for Private Market Success

LIAA

• Limited post-disaster financial assistance

• Improved public awareness of flood risk

• Accurate flood maps

• Adequate investments in public/priv flood defences

FRM Responsibilities → Communities & Individuals

• Seek info to understand flood risks

• Take non-structural & structural mitigation efforts

  • Flood-proof homes

  • Purchase adequate flood insurance

Strategic Relocation

Removing asset/property at highest flood risk areas through gov buyouts

• Eliminates risk entirely

Issues:

• Challenging

• Time-consuming

• Expensive

Inputs for estimating financial flood risk

• Flood hazard → size, magnitude, probability of occurrence

• Exposure → ppl & assets which may be affected

• Consequence → how much damage flood is likely to cause

Flood Insurance → Australia

• Fully privatized market w/ regulation from gov

• Voluntary offer & take-up of insurance

• Risk-adjusted prem

  • Not subsidized by gov

• Advantage: low cost to gov

• Weakness: affordability/availability for high risks

Flood Insurance → France

CatNat scheme

• Flood insurance provided thru extension of priv insurance

• Uniform 12% surcharge on home insurance to cover natural disasters

  • Mandatory take-up for mortgages

• State-owned reinsurance backed by gov

• Strengths: availability, affordability, market penetration

• Weakness: uniform surcharge → no incentive for risk reduction

Flood Policy → Guiding Insights

UMAM

Uncertainty

• Locate, map & publicize high-risk areas

Market Penetration

• Leverage gov programs to incentivize purchase of flood insurance in high-risk areas

• Bundle flood w/ other perils

Affordability

• Negotiate simple def’n of flood insurance affordability

Moral Hazard

• Clearly outline exclusions

• Avoid incentivizing development in high-risk areas

Flood Insurance → Public Policy Objectives

ARAM-AV

Adequate & predictable financial compensation

• w/ efficient claims handling

Risk-informed price signals & mitigation

• Reduce incentives that inc flood risk

Affordable for high-risks

• Special consideration for marginalized groups

Available for high-risks

• In all geographic regions

Max participation

• Ensure high uptake in high-risk areas

Value for Money for gov

• Cost-effective & sustainable

Flood Policy Objective Trade-Offs

• Risk-based pricing → not affordable for high-risk

• High gov costs from:

  • Inc affordability → reduced incentive for risk reduction

  • Max participation using gov funded subsidies

• Lowering cost for gov → shift burden to homeowners & municipalities

Insurance Model → Flat Cap High-Risk Pool

• Pool for high-risk homeowners

  • Min gov intervention

• Mandatory offer, optional purchase

• Risk-based prem w/ single flat cap

• Funded by gov & small levy on all home policies

Insurance Model → Tiered High-Risk Pool

• Pool for high-risk homeowners

  • More gov intervention than flat cap

• Mandatory offer

  • Mandatory purchase w/ mortgage

• Homes divided into tiers based on reconstruction costs

  • Each tier has diff prem cap

• Funded by gov w/ higher levy on all home policies

Insurance Model → Public Insurer

• UW by Crown corporation

  • Priv insurers as intermediary

• Covers ALL flood risk → not just high-risk

• Both offer & purchase mandatory

• Prem cap higher than pooled models

  • Income-based subsidy to inc affordability

• Funded by gov & levy on all home policies

Insurance Model → Public Reinsurer

2 Layers

• 1st layer: Optional purchase of flood covg

  • Risk-based prem

• 2nd layer: Mandatory purchase of insurance above limit

  • Reinsured by Crown corp

  • Same prem cap & income-based subsidies like Public Insurer model

How is gov backstop used in flood models?

• Provides stabilization

  • Esp in initial years w/ less funds

• Capital investment & accumulation of reserves reduces prob of using backstop over time

Evaluating 4 Models → Adequacy & Predictability of Compensation

Flat Cap High-Risk Pool → Avg

• Optional purchase may lead to inadequate covg

Tiered High-Risk Pool → Avg

• Mandatory purchase for mortgage holders

Public Insurer → Strong

• Standardized policy language & covg

• Comprehensive bundled flood covg removes ambiguity

Public Reinsurer → Strong

• Mandatory 2nd layer ensures major events are covered

• Standardized policy language & covg

Evaluating 4 Models → Risk Reduction

Flat Cap High-Risk Pool → Avg

• Low prem cap → weak incentive for property-level risk reduction

Tiered High-Risk Pool → Avg

• Progressive prem caps → more incentive than Flat Cap

• Stronger price signal than Public models bc no income-based subsidies

Public Insurer → Avg

• High prem caps → more incentive

• But reduced by income-based subdieis

Public Reinsurer → Strong

• Balances homeowner & gov mitigation incentives

Evaluating 4 Models → Affordability

Flat Cap High-Risk Pool → Strong

• Flat cap highly affordable

• But subsidized wealthy homeowners

Tiered High-Risk Pool → Avg

• Home value not perfect proxy for wealth

Public Insurer → Strong

• Prem cap & income-based subsidy

Public Reinsurer → Avg

• Layer 1 may be unaffordable for high risks

• Layer 2 has prem cap & income-based subsidy

Evaluating 4 Models → Availability

All models are Strong!

• All assume mandatory offer

• Challenge in communities w/ limited insurance companies

Evaluating 4 Models → Participation

Flat Cap High-Risk Pool → Weak

• Low cap attracts participation

• Optional covg leaves substantial residual risk

Tiered High-Risk Pool → Avg

• Mandatory for mortgage holders inc participation

Public Insurer → Strongest

• Mandatory purchase w/ home insurance

Public Reinsurer → Strong

• Layer 1 → optional

• Layer 2 → mandatory purchase

Evaluating 4 Models → Value for Money

Flat Cap High-Risk Pool → Weak

• Prem caps → significant gov funding

• Optional risk → high residual risk

Tiered High-Risk Pool → Avg

• Prem caps → gov funding

• Mandatory for mortgage-holders → less residual risk

Public Insurer → Strong

• Higher gov cost but lowest residual risk!

• Economical on a per high-risk home basis

• Predictable costs

Public Reinsurer → Strong

• Balances gov funding & residual risk

• Significant flood events protected

Why is it hard to assess flood risk?

Exposure

• Hard to est # of properties affected in future

• Due to growing population

Tail Risk Flood Events

• Likely not in historical data but can cause significant damage