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02 Jul 14 23:35

2013 set a record in Canada as the first time the country has suffered two natural disasters causing more than $1billion in damages. It was also the fifth consecutive year of billion dollar events. Canada is exposed to many different natural disasters with earthquake, winter storm, wildfire and flood being among the most likely to impact our lives and economy. For years we escaped relatively unscathed until last summer's devastating flooding in Alberta and Toronto. And while it may be difficult for those directly involved to imagine, it could have been a whole lot worse.

June and July mark the one year anniversary of these events – the largest insured losses in Canada's history with approximately USD2.8 billion in payments and more than double that in economic losses - it's vital that we don't continue to ignore these threats because if we do, we do so at our own peril.

The cost of Canadian natural disasters is rising dramatically. Consider the increasing frequency and severity of events and add to that the fact that development continues to place more valuable assets such as buildings and homes in at-risk areas, and you have a recipe for potential disaster. Don't take the insurance industry's word for it. The cost-sharing arrangement between the federal government and provinces and territories (DFAA) for disasters has ballooned in a short time. In fact, 96% of all payments made from the DFAA have happened since 1996 and the program has existed for nearly 45 years. On average, nine payouts were made annually in the previous decade, but in 2011 there were 26.[i] Last year the Canadian Forces announced it will begin charging local governments for assistance provided in the wake of natural disasters. This type of assistance is critical to our economy, and cannot be sustained without the help of other mechanisms, including pre-event risk financing.

Canada has sought to address some of these issues by developing a blueprint for resiliency– a National Disaster Mitigation Strategy. Now is the time to finish the job and implement it. If not, the next wildfire, quake or storm could be crippling– not only to individual citizens, but to local economies.

The public and private sectors have a shared responsibility to mitigate the risk of wind, water, fire and quake. On the private side, insurance helps home and business owners rebuild and recover from a disaster, but that’s only part of the story. On the public side, governments need to protect their investments in public works, infrastructure, emergency response and social services – which can be compromised, or even worse, obliterated, by wind, flood, fire and tremor.

Consider the one-two punch of hurricane Sandy in 2012 which was quickly followed up by winter storm Nemo, which caused billions in insured and economic losses. Or the 2014 winter which disrupted many U.S. states, as far south as Georgia, unaccustomed to having to deal with prolonged severe winter weather. With no disaster relief funding in place before the event, local governments in the U.S. had to make tough budget choices and some priorities were cut or at least relegated to the back burner.

Other recent events provide more sobering lessons about the financial impact of natural disasters. Japan lost roughly 5 percent of its GDP in a matter of minutes after the March 2011 9.0-magnitude earthquake struck off the east coast of the main island, Honshu, and the government and taxpayers absorbed almost all of the cost.[ii] New Zealand was well prepared for the Christchurch earthquake in September 2010, but the far more devastating aftershock six months later was a tipping point[iii], triggering fervent discussion about the cost and availability of insurance going forward and the role of the government and private sector in disaster mitigation and financial recovery.[iv]

Other nations are beginning to recognize that it’s not necessary to ask taxpayers to foot the entire bill or sacrifice other important programs to rebuild roads, bridges and levees and restore emergency response services. Mexico, for example, is tapping the risk diversification capabilities of the insurance and capital markets to reduce the financial impact of these events. By selling some of the risk to private investors, governments reduce their unexpected financial risk,thereby preserving more funding for other projects and giving them more latitude to plan for the future.

These solutions also give government decision makers, for the first time, an independent market-based estimate of a nation's climate and weather risk. By putting a price tag on unmitigated risk, a government can make more educated decisions in how to allocate its financial and human resources towards risk prevention.

Emergency management ministers approved guiding principles for a National Disaster Mitigation Strategy in 2005. They promise to “strengthen and develop resilient and sustainable communities in order to reduce social,environmental and economic impacts of disasters.”[v] Years in development, the blueprint has garnered the support of government, business,academia, NGOs, nonprofits and other key stakeholders.

Given the urgency of the situation and the very real threat to our communities and to society, now is the time to turn talk into action and implement the National Disaster Mitigation Strategy – before the next big storm, fire or quake. 

Jonathan Turner
Chief Financial Officer, Swiss Re Canada

Footnotes:
[i] Public Safety Canada: 2011-2012 Evaluation of the Disaster Financial Assistance Arrangements Program, http://www.publicsafety.gc.ca/abt/dpr/eval/_fl/dfaa-eng.pdf
[ii] Japan says quake rebuilding to cost as much as 25tn yen,http://www.bbc.co.uk/news/business-12828181
[iii] Sigma report: Natural catastrophes and man-made disasters in 2011, Swiss Re, http://media.swissre.com/documents/sigma2_2012_en.pdf
[iv] Insurance Shocks: Market Behaviour and Government Responses, EQC (New Zealand earthquake commission), 30 June 2012, http://www.eqc.govt.nz/research/research-papers/insurance-shocks-market-behaviour-government-responses
[v] Public Safety Canada: Canada’s Natural Disaster Mitigation Strategy,http://www.publicsafety.gc.ca/prg/em/ndms/strategy-eng.aspx


Category: Climate/natural disasters: Climate change, Disaster risk, Earthquakes, Floods/storms, Resilience

Location: Canada


1 Comment

Megan Linkin - 3 Jul 2014, 2:01 p.m.

Jonathan, this is a excellent summary demonstrating why it is important for governments to tap into the private sector for post-disaster financing. The current approach to disaster risk financing, in many developed and developing economies, is simply unsustainable, and financial stress after disasters will only intensify due to both economic growth and climate change.

Fortunately, though, I believe we're starting to see a paradigm shift. Mexico, as you mentioned, has leveraged the both the traditional insurance market and the capital markets for disaster risk financing and government pool programs, such as the CCRIF and PCRAFI, have already demonstrated their benefits to the countries.

I hope developed economies such as Canada take note of the successful programs implemented elsewhere and realize that even the world's strongest economies are not immune to the effects of natural disasters, and it only takes one to have a significant, long term impact.


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