Severe forest fires, floods and other extreme weather events have hit many Canadian regions hard, with climate change the probable cause. These severe events have destroyed housing, commercial property and infrastructure with a lengthy recovery period ahead. Insured and uninsured losses will be in the billions, in addition to the cost of repairing public infrastructure. Lives have been lost in some cases.
These events are a wake-up call. We need improved risk management and climate adaptation, since there will be many other extreme weather events. A forward-looking risk management plan through comprehensive property insurance and climate adaptation would reduce the need for governments to assume an open-ended climate damage risk and related costs. Without adequate flood, fire and other severe weather insurance coverage, property owners will inevitably seek bailout financing from governments to restore the property to a livable state, or to pay for it to be abandoned.
Some key questions need to be addressed.
Should property insurance that covers flooding and other extreme weather be made mandatory (like basic auto insurance)? Mandatory coverage would expand the risk pool and thus improve the capacity for effective management.
Can the private sector bear the risk alone, or is government involvement required? And who will pay the premiums on high-risk properties? The cost of flood insurance on high-risk properties is likely to be prohibitive.
What else can be done to mitigate risk for properties built on flood plains and near forests? Up to 10 per cent of residential properties in Canada have been built on flood plains over many decades, and in some regions homes are built in or near forests. Climate change is expanding the risk of floods and fire, yet new construction is still being permitted in many instances. As a first step in risk management, it would make sense to stop new construction in risky areas. Expropriation of existing at-risk properties might also be considered, but it is expensive and governments usually only consider it after the fact.
The options for pooling flood risk have been extensively analyzed. Last fall, a national task force on flood insurance and relocation produced the report “Adapting to Rising Flood Risk: An Analysis of Insurance Solutions for Canada.” Total residential flood risk is estimated at $2.9-billion a year, markedly higher than previous estimates. However, only 40 per cent to 60 per cent of Canadian homeowners currently purchase some form of flood coverage, with uptake concentrated in low- and medium-risk areas. According to the task force, the mandatory offer of flood insurance by insurers is a fundamental requirement for a successful flood insurance arrangement in Canada; voluntary purchase will not produce sufficient market penetration. However, homeowners in high-risk areas are likely to face a premium cost that is prohibitive.
The report examined four models in detail. In simple terms:
- Model 1 would create a private-sector risk pool for high-risk homeowners, with a significant subsidy from governments to achieve a single and relatively low flat premium cap for high-risk properties.
- Model 2 builds on model 1 by dividing high-risk homes into quintiles (five equal shares) based on estimated home reconstruction costs, with a premium cap in each quintile that increases as reconstruction costs increase. Mandatory purchase of flood insurance is required for properties with a mortgage.
- Model 3 features a Crown corporation that provides an automatic government backstop for comprehensive flood insurance by the insurance industry.
- Model 4 introduces a layered approach to public reinsurance with the optional purchase of flood insurance from the private market up to a limit, and mandatory purchase of flood insurance above this coverage limit, with a government risk backstop.
Similar detailed analysis is warranted for forest fire risk, especially if private insurers decide to stop underwriting new property insurance in affected regions – as is now occurring in California.
There is no silver-bullet option; trade-offs will be required and government support for high-risk properties will almost certainly be required. Nevertheless, by shifting public spending from recovery to risk management and mitigation, governments can better assess the scale of risk, improve fiscal planning and steadily enhance risk management.
Political will is now required for the federal and provincial governments to align around a reasonable policy. Discussions on better flood risk management have been continuing for many years. Even with a thoughtful options paper, the issue is still not being treated as a high priority.
Yet governments are inevitably the de facto backstop for all uninsured extreme weather losses. Indeed, after Hurricane Fiona hit Atlantic Canada and Quebec last fall, the first impulse from some premiers was to offer compensation for homeowners who were not adequately insured. This might be a popular short-term fix, but it creates poor incentives for forward-looking risk management by households and governments.
What will it take to finally adopt a realistic plan for extreme weather risk management? This is a question of political will and leadership, not just finding the best possible technical solution.
