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Designing Flood Insurance to Maximize Public Benefits in High-Risk Areas
Michael Bourdeau-Brien1, Jason Thistlethwaite2, Mathieu Boudreault3
1Département de finance, assurance et immobilier, Université Laval, Quebec City, Québec, Canada.
Summary
Designing effective flood insurance programs balances affordability with risk. The Canadian Flood Insurance Program (CFIP) study suggests optimal designs include progressive subsidies, premium caps, and risk-based exclusions to maximize public benefits.
Area of Science:
- Environmental policy
- Risk management
- Insurance economics
Background:
- Flood insurance programs aim to balance affordability and adverse selection.
- Government policy choices significantly influence flood insurance program design and outcomes.
- International variations exist in achieving affordability, adequate compensation, and market participation.
Purpose of the Study:
- To evaluate design elements of the Canadian Flood Insurance Program (CFIP).
- To understand how deductibles, limits, exclusions, and subsidies affect policy objectives.
- To identify optimal trade-offs between affordability, compensation, and market participation.
Main Methods:
- Utilized a novel dataset of 700,000 simulated flood loss events.
- Evaluated various combinations of insurance design features.
- Analyzed the impact of design elements on program objectives.
Main Results:
- An optimal design includes progressive subsidies and premium caps.
- Moderate deductibles and coverage limits are recommended.
- Exclusions for the highest-risk households are part of the optimal design.
Conclusions:
- The proposed design maximizes public benefits of flood insurance in high-risk areas.
- Findings provide insights for Canadian policymakers and international comparisons.
- Balancing affordability and adverse selection is key to successful flood insurance programs.
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