The insurance industry is fully capable of meeting its obligations in the wake of the Fort McMurray fire, yet the assets lost are a sobering reminder of the ferocity of nature’s perils and our vulnerability.
Replaying the scenes of the devastation in my mind, I’ve been thinking about how resilient we really are – both physically and financially. Are Canada and its citizens equal to the challenge of extreme events like Fort McMurray? What about other events such as earthquake and flood? I think there's work that can and should be done.
My colleague, Christoph Oehy, Head Treaty Underwriting, and I share a passion of wanting to raise the odds of Canada's preparedness for when the next flood strikes. Over the past year, we've discussed, at length, what we think is needed for that to happen, and how we can help. Those conversations are now compiled in a report Christoph co-authored with our flood peril specialist, Caspar Honneger. The road to flood resilience in Canada explores the consequences of a 200-year event and recommends steps to close the protection gap – the difference between economic and insured losses.
Our research estimates that Canada’s property protection gap is CAD$2.9 billion – the 11th highest in the world. It’s a sad fact that few homeowners have flood insurance. One major event could result in damages that far outstrip the level of insurance available in the market. We only need to look back a couple of years for a vivid illustration of this problem. In 2013, insurance only covered about one-third of the economic losses from the southern Alberta floods and CAD$1 billion of the nearly CAD$1.5 billion in total losses from the Toronto flood.
So what’s causing this protection gap? There are many reasons, but let’s look at two very important factors. First, there’s a general misunderstanding (or assumption) that the government will step in and pay for extensive repairs and replacement, which leads to complacency about the need for insurance. Second, insurers have been hesitant to take on flood risk due in part to inadequate modelling skills and no clear actions to continuously mitigate exposures, which homeowners and municipalities are in charge of.
Ignorance and maintaining the status quo are no defense against the very real threat of a 200-year flood. Consider the following river flood projections based on a model developed by our catastrophe peril experts:
- A 200-year flood in Ontario is likely to be triggered by heavy precipitation and inadequate urban drainage, resulting in total losses approaching CAD$5.3 billion -- CAD$4 billion of that is uninsured at the moment.
- A 200-year flood in Alberta could destroy CAD$3.6 billion in property -- CAD$2.6 billion of that uninsured -- caused by excessive snowmelt on the Bow and Elbow Rivers which converge at Calgary.
- In British Columbia, development along the Fraser River would exacerbate already tenuous flood conditions in the event of a heavy snowmelt, triggering CAD$4.6 billion in losses of which CAD$2.8 billion isn't covered by insurance.
Those are just a few examples. As you can see, the culprit varies depending on geography, topography, climate, population, development and local infrastructure.
Canada's the only G7 country today that leaves homeowners largely unprotected from the financial losses caused by floods, and still relies on post-event measures, which are sincere but ineffective and certainly unsustainable. So what will it take to change the multi-party conversation on the flood file and close the flood protection gap through planned actions? You’ll find our recommendations in the report, but here’s the general idea: It will take partnership between the public and private sectors to satisfactorily address the need for physical resilience, social resilience and economic resilience (all three are important). Insurance can lead the way to higher economic resilience through improved modelling, product innovation and application of behavioural economics toward better understanding consumer attitudes and motivations when it comes to the perceived value of insurance. A clear appreciation for the value of insurance is directly linked to 1) a well-informed choice when selecting coverage and 2) in assuming responsibility through very simple and inexpensive risk mitigation measures that can save thousands of dollars in losses as well as emotional distress.
I encourage you to read this report – while it's scientifically sound it's also an easy read. And you can always reach out to us through this blog if you have questions or tips on how to make the dialogue richer and the actions more compelling. I'm convinced we can make a difference if we all take responsibility.
And if you’re having some of these same discussions with colleagues, please let us know. That's how it all started for Christoph and myself a year ago in our Toronto office.
Category: Climate/natural disasters: Disaster risk, Floods/storms, Resilience
Location: Toronto, ON, Canada