The answer states that insurers could charge little to no additional premium for 'almost nil' flood risks. However the annual risk premium is $50 which is substantial. The annual probability is very low, but this should be considered alongside the expected severity of flood claims; hence the $50 RP is arrived at. It's not clear to me why the examiners answer includes this point. Reinsurance may cover accumulation in the 1 in 250 event etc, but reinsurance costs still need to be charged to premiums. LTAs for flood risk should also be allowed for in premium. It's also not really possible to cross subsidise this cost within the same line of business (because almost nil is 96% of exposure). Or perhaps I am misinterpreting the point, maybe additional premium is the excess over the risk premium? Seems a stretch though. Can I get your thoughts please?
Many things drive premium rates - it's certainly an option to ignore that small flood risk, but the insurer would have to accept the risk of ignoring it. Reinsurance costs aren't always charged to premiums - some practitioners would say that you can't pass all this cost on to customers and that free assets should be used to cover the cost of reinsurance rather than policyholders. It's debatable for sure. I think it's important in the exam not to be too dogmatic about the 'right' approach - the examiners are after 'possibilities' and a discussion around them rather than a definitive approach. Hope that helps.
