Findings on Insurance Discussed by Investigators at University of Quebec Montreal (Ratemaking Territories and Adverse Selection for Flood Insurance): Insurance

2022 NOV 10 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- Current study results on Insurance have been published. According to news reporting out of Montreal, Canada, by NewsRx editors, research stated, “Flood insurance is key to increase resilience but remains challenging to price for actuaries. Despite recent advances in high-resolution flood risk modeling, there are serious obstacles to implementing perfect risk differentiation at the homeowner’s level.”

Funders for this research include Co-operators General Insurance Company, Canadian Institute of Actuaries through the Mitacs Accelerate Program.

Our news journalists obtained a quote from the research from the University of Quebec Montreal, “Creating more homogeneous ratemaking territories or groupings is one obvious solution but they need to be designed with care to avoid introducing significant adverse selection. Adverse selection may occur in insurance whenever the pricing structure is such that it attracts too many homeowners with underpriced policies affecting in turn the viability of the product. In this paper we create ratemaking territories (contiguous or not) for flood insurance based upon clustering techniques (forcing contiguity or not) and compare their risk differentiation capabilities with postal/zip codes, geopolitical territories or floodplain boundaries. We investigate adverse selection by setting up markets made of rational homeowners seeking for flood insurance among two competing sellers using different ratemaking territories. Based upon public data from Calgary (Canada), we find that postal/zip codes and the annual flood probability do not sufficiently capture flood risk, leading to significant adverse selection. When an unsophisticated seller uses geopolitical boundaries, it attracts homeowners with expected losses 2-5 times larger than its competitors yielding a loss ratio that is twice as large.”

According to the news editors, the research concluded: “The paper thus highlights the significance of adverse selection when selling flood insurance, with implications in actuarial science, climate risk management and public policy.(.”

This research has been peer-reviewed.

For more information on this research see: Ratemaking Territories and Adverse Selection for Flood Insurance. Insurance Mathematics and Economics, 2022;107:349-360. Insurance Mathematics and Economics can be contacted at: Elsevier, Radarweg 29, 1043 Nx Amsterdam, Netherlands.

Our news journalists report that additional information may be obtained by contacting Mathieu Boudreault, University of Quebec Montreal, Faculty of Sciences, Dept. of Mathematics, Montreal, Pq, Canada.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.insmatheco.2022.09.005. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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