Insurance coverage

Opinion: Underwater: Where’s the flood insurance coverage?

Glen Hodgson is a Fellow in Residence at the CD Howe Institute.

The recent terrible floods in British Columbia have confirmed how unprepared we are for climate change and severe weather. Extensive damage in British Columbia was in the spotlight; a similar event in another province would have many of the same disastrous consequences. The federal and British Columbia governments announced this week that they will spend $228 million to help affected farmers and their communities return to normal production operations.

What can be done to help protect the value of physical assets against climate risk – especially housing and commercial buildings? More universal access to flood insurance is the most obvious risk management tool, with significant investments in public infrastructure to build resilience. However, overland flood coverage has been available for less than a decade and currently only a few Canadian P&C insurers offer it.

In addition, up to 10% of Canadians live in high-risk flood zones. For them, flood insurance coverage is generally not available. For insurers, the likelihood of more extreme rainfall events only increases the challenge of providing flood insurance coverage. In British Columbia, insured flood losses have already been estimated at $540 million; the extent of damage to uninsured properties is necessarily significant.

British Columbia’s Costly Weather Disasters Show Canada’s Insurance Gap

What are the public policy options? Governments have a choice between continuing to react after the fact or developing a plan to help homeowners manage flood risk. The Insurance Bureau of Canada represents the P&C insurance industry and has been a prominent voice in promoting a more militant strategy. He proposed five key measures to manage flood risk: better public education; get people out of harm’s way; stop building on (expanding) floodplains; investing in flood defences; and giving everyone access to flood insurance.

In the absence of an active strategy to expand insurance coverage in high-risk areas, governments and taxpayers are de facto backstop for uninsured properties. Bailout funding is used to repair affected homes and commercial structures, as well as for the expropriation of high-risk properties in floodplains to avoid the need for future flood damage and bailouts. The annual liability for Federal Disaster Financial Assistance Arrangements (DFAAs) has grown from $100 million per year before 2000 to nearly $500 million in 2009-10 and $2 billion in 2013-14. The latest publicly available estimate from the Parliamentary Budget Officer (as of 2016) projected the annual flood liability for governments at almost $700 million per year.

Moving from a passive to an active flood management strategy could help improve budget planning, manage these costs, and promote resilience and risk prevention. After years of discussion, a working group was finally created in November 2020 to address the development of an active strategy. The Flood Insurance and Relocation Working Group includes representatives from federal, provincial and territorial governments and the insurance industry. It examines flood insurance options for residents of high-risk areas, as well as potential relocation options.

What are the active risk management options? They include:

· Premium Support for high risk properties. The property insurance industry would be expected to underwrite flood risk for the vast majority of individual properties, setting market-based premiums. Governments would subsidize part of the premium for high-risk properties, since very high annual premiums (eg $10,000 or more) would be likely. Detailed criteria would be needed to determine who is eligible for premium assistance.

· Income support owners of high-risk properties to purchase insurance. Eligible homeowners could receive income support, rather than subsidized premiums, to help them obtain insurance coverage. This approach would avoid direct government intervention in the property insurance market. It could also be subject to a means test.

· What’s more flood reinsurance pool created by industry, government or a combination, would separate high-risk properties from other properties covered by flood insurance and, by spreading the risk over reinsurers, would provide an additional layer of targeted risk management. Governments could create the pool or commit to cover excessive losses by a pool of private sector flood reinsurance beyond its financial capabilities.

A premium subsidy and income support program should be funded from federal and provincial government budgets, reallocating funds already covering the cost of disaster relief. Any program should reflect factors such as property value, homeowner income levels, anticipated flood risks, deductibles, coverage limits, etc. New construction in high-risk areas could also be banned or excluded from coverage.

Responding to crises after the fact is rarely the best public policy approach. Getting ahead of the climate change curve means implementing a range of policies to mitigate its impact and promote adaptation to the new reality. We would advise a comprehensive approach that combines income support or premium subsidies to buy insurance cover for high-risk properties, the creation of a public-private reinsurance pool, selective expropriation and prohibition new construction in areas at high risk of flooding. The formation of the public-private task force suggests that governments are finally taking flood risk management seriously. The task force is expected to report in the spring of 2022 – late, but better late than not at all.

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