Consider the Nation Flood Insurance Program [NFIP].
- Under the NFIP, have coastal property owners historically been charged a premium which is actuarially fair? Explain. (2 points)
No. National Flood Insurance Program always provides low rates of insurance purchase due to its flawed structure of rates, risks and incentives. Artificially low premiums that do not reflect true risk, loopholes that allow some properties to keep their rates low through grandfathering provisions, repeated payouts for losses to the same high-risk properties, and the failure to account for future sea level rise in flood risk maps that help determine insurance rates.
- Consider the characteristics of an Ideally Insurable Risk. Is the peril of flood an ideal risk to be insurable in the private market? Why or why not? Please provide two reasons to justify your answer. (4 points)
No. Flood can bring huge cat loss to an insurer. During this single random event, multiple losses occur at the same time which is correlation among losses and not independent. It is difficult for insurers to predict overall expected loss. When the risk charge will increase, the price of premium will also increase. Also, the insurers face the risk of insolvency
- Given the pricing structure for premiums under the NFIP, what behavioral incentives are present for property owners? (2 points)
Opting out isn’t a choice for many, since flood insurance is mandatory for properties with federally insured mortgages. And there is little people can do to lower premiums shy of elevating properties, which likely would cost multiple tens of thousands of dollars. If people do not have enough money to cover the cost, they would be forcing move out of their homes.
- What is the impact of the Biggert-Waters law of 2012? (1 points)
- S. bank regulators proposed that federally regulated lenders are required to make sure their borrowers in flood-prone areas have special insurance policies that cover folding. Explain why. (1 points)
