Universal Flood Insurance - Assignment Example

The article is about insurance companies’ refusal to make payments to affected families in Canada after the Alberta floods. The author explains the reasoning behind intricacies of contract law to explain the reason for insurance companies not to pay flood victims, as they did not agree to cover flood liability. To begin with, flood insurance gives an exemption of floods as insurable damage but insurance companies and their clients can agree to include it in their contracts. The other reason given for the lack of insurance for floods is the low rate at which floods occur as people live in high ground; hence, they would not take flood insurance, if it were offered.

The other reason for the choice of insurance companies not to offer flood insurance is that they have to research on risks of floods and if they offer flood insurance, they have to set premiums at equilibrium with expected loss. Frequent floods make payments of premiums frequent leading to zero insurance, except for high-end clientele who can afford to pay high premiums. Insurance in the United States and the United Kingdom exists only owing to funds and subsidization but runs at a loss.

There are two reasons suggested for Canada to adopt a cross-subsidization scheme. The first reason is the belief by people that they are covered for floods yet in reality they are not, which hurts the insurance industry’s image. Secondly, it will provide growth opportunities owing to the fact that the insurance industry is a mature industry. Cross-subsidization entails payment of premiums by non-risk homes but may result in moral hazard including building homes in high-risk areas because they are insured.