Flood

Definitions

Flood

An overflowing of a body of water onto normally dry land or an unusual rise in the level of inland or tidal waters.

Flood Insurance is available on commercial risks, depending on the location of the property, but is usually not available on homeowners risks (in 2015 Aviva made overland flood insurance available for homeowners in Ontario and Alberta) . If a peril such as flood, for example, cannot be insured against, that’s usually because such damage is inevitable. A house built in an area which can be flooded eventually will be flooded.

Canada

There is no comprehensive accurate mapping of flood zones in Canada (except some proprietor models, e.g., Aon).  This is being addressed by IBC in 2015. Currently their is a patchwork of information from various areas in Canada.

From IBC position paper

A Statement of Principles Regarding Insurance and Natural Hazards – February 1994

Part I – Climatic Hazards

Canada is exposed to many natural hazards including climatic hazards such as extremes of temperature, precipitation and high winds. Canadians have, over the years, adapted themselves and their surroundings to deal with most climatic hazards. A standard property insurance policy, for example, generally provides coverage against perils such as strong winds, tornadoes, hurricanes, hail and freezing rain. Coverage for additional perils such as torrential rain, sewer back-up and damage caused by the weight of snow are also generally available as endorsements, or additions, to the standard property policy.

Some climatic-related hazards, however, are not generally covered by standard insurance policies or endorsements because such hazards do not satisfy usual underwriting requirements. Damage caused by flooding from lakes, rivers and streams, as well as waves, tides and tidal waves are examples of localized risks which violate basic underwriting principles, and thus are not covered by standard insurance policies.

In order to operate effectively as a risk-spreading mechanism, insurance requires that a relatively large population is exposed to a risk, and thus interested in purchasing insurance; and that only a small percentage of this population is likely to sustain a loss at any given time.

As a result, the losses of the few can be paid from the premiums of the many. In the case of flooding, for example, the population at risk tends to be small, and localized — only those living in flood-prone areas will have an economic interest in purchasing flood insurance; furthermore, with each event a large percentage, or indeed the entire exposed population, is likely to sustain a loss.

Another underwriting principle which generally must be satisfied for effective risk-spreading is random occurrence of losses. Flood losses are not always random occurrences. Typically such losses occur at fairly regular, and in some parts of Canada, fairly frequent intervals. What should be considered in these instances is not an insurance, or risk-spreading mechanism, but rather a savings vehicle for the exposed population to shore up reserves to pay for relatively well-known future expenses. Alternatively, the preferred approach of the property and casualty insurance industry is to discourage development in known flood plains, and to provide incentives for development in these regions to relocate to less hazardous areas.

In sum, three key principles should be satisfied when underwriting insurance:

  • a relatively large population exposed to a risk,
  • a relatively small share of the exposed population likely to incur a loss at any particular time, and
  • random occurrence of losses.

These requirements are usually not met in the hazard of localized flooding and waves. As a result, accurate risk assessment is not possible and exposure to these risks may give rise to solvency concerns. Preventative actions, such as improved land-use planning, flood controls, and the development of local savings vehicles are possible alternatives.

U.S.

Flood Hazard Boundary Map (U.S.)
A flood map published by the Federal Insurance Administration for a specific community which indicates areas within the community that are subject to severe flooding. These maps are the basis for requiring a community to join the National Flood Insurance Program. If a community does not join the program, it may lose federal disaster relief in the event of flooding. Each community map is assigned an identification number which must be used when applying for flood insurance in that community.

Flood insurance
Insurance that reimburses the policyholder for damage to property caused by the peril of flood.

Flood Insurance Manual (U.S.)
A manual published by the National Flood Insurance Program that includes the program’s eligibility and policy writing rules, as well as rating information.

Flood insurance rate map (FIRM) (U.S.)
A flood map published by the Federal Insurance Administration developed from a community flood study and used to produce actuarial rates. Once this map is complete, a community is eligible for the National Flood Insurance Program. Rates developed from this map are termed pre-FIRM or post-FIRM, depending on when a building is constructed.

Emergency National Flood Insurance Program (U.S.)
One of two National Flood Insurance Programs available to communities. This one provides coverage until the requirements for the Regular National Flood Insurance Program are met. Amounts of coverage available under this program are: for single family dwellings, $35,000 on the structure and $10,000 on contents; for small businesses, $100,000 on the structure and $100,000 on contents.

Regular National Flood Insurance Program (U.S.)
One of two national flood insurance programs. It requires the completion of a flood study of the community by the Federal Insurance Administration and publication of a Flood Insurance Rate Map. Once a community is approved, residents may purchase flood coverage in excess of the limits of the Emergency National Flood Insurance Program. The available coverages are: for a single family dwelling, $150,000 on the structure and $50,000 on contents; for a small business, $150,000 on the structure and $200,000 on contents.

National Flood Insurance Program (NFIP)(U.S.)
A program administered by the Federal Insurance Administration that provides flood insurance under the National Flood Insurance Act of 1968. A number of private insurers are under contract to the NFIP to administer the program. These insurers issue the program’s Standard Flood Insurance Policy, they are reinsured for 100% of any flood losses by the federal government, they collect the premium, and they adjust the losses. They receive a percentage of the premium for commissions, taxes, and allocated loss adjustment expenses.

Resources and Markets

NEXT SUBJECT > < PREVIOUS SUBJECT
Contact us for assistance