What does a prepaid debit card have to do with Canada’s flood insurance shortfall? Those prepaid debit cards issued by the Ottawa government to flood victims can offer a false sense of security, that homeowners will receive emergency funds that preclude the need for insurance. While the Disaster Financial Assistance program is undoubtedly laudable and an important element of post-disaster recovery, it’s only part of the solution. It will take a collaborative effort to ensure every citizen has the means to adequately recover from a flood — or any disaster, for that matter.
To understand the problem it helps to understand what we call the “protection gap,” the difference between total economic losses and insured losses. Much of this gap is due to uninsured natural catastrophe risk, which has been rising steadily over the past several decades. Swiss Re’s latest sigma report, Underinsurance of property risks: closing the gap, reveals that total economic losses from natural disasters have averaged around USD 180 billion annually in the last decade, with a staggering 70% of that amount (USD127 billion) uninsured. Earthquakes, floods and windstorms are the typical culprits, particularly in densely populated areas with a high concentration of property value. The US, Japan and China are the top three, accounting for USD 81 billion out of a USD 153 billion gap worldwide.
Canada sits at #11, with an expected annual gap of USD 2.1 billion, and we too have felt the force of nature in recent years. Rebuilding continues from the 2013 flooding, the largest insurance event in Canadian history. About one-third of Alberta’s more than CAD 6 billion of economic losses were covered by insurance (CAD 2 billion) and CAD 1 billion of Toronto’s nearly CAD 1.5 billion in economic losses were covered.
Although flooding is the most frequent natural disaster, awareness of the risk it carries is typically low; Canada is one of few economies that doesn’t have a mature insurance market for flood and the majority of flood risk is uninsured. Overland flood exclusions and very low sub-limits on sewer back-up coverage of residential property policies often leave most property owners without the money to adequately recover and rebuild.
Let's take an historical perspective: since 1975, on average, 86% of global flood losses have not been covered by the insurance industry.
To be clear, it's not bad will on the side of the industry. Inadequate mapping and modeling have made flood difficult to insure. For years, insurers couldn’t underwrite to profitability and most exposed homeowners found premiums unaffordable. Alarmingly, even after hurricane Sandy hit the US East coast and caused physical and non-physical damages in excess of USD 70 billion, only about half of the residents who live less than a block from the water have flood insurance.
There is reason to be moderately optimistic, though. It's two years since the waters receded in Alberta and Ontario, and there is good news to report: risk awareness and assessment capabilities have greatly improved. Canadian underwriters are using flood zones widely and flood-modeling tools are being rolled out to better assess the accumulation risk. These advancements are laying the foundation of a private market for residential flood insurance in Canada, and a couple of carriers are already offering overland water endorsements in selected areas.
We’re also seeing substantive steps taken in the stewardship of our resilience. In November, Public Safety Canada will host the 6th annual National Roundtable meeting of Canada’s Platform for Disaster Risk Reduction, where in a multi-disciplinary setting, we will examine how governments, the insurance industry and other key stakeholders, can cooperate and share information to support the creation of appropriate conditions to better manage risk. Flood will be prominently featured.
Canada is not dissimilar from other mature markets such as the US, Japan and Australia, where risk prevention measures, such as implementing or revamping building codes that reduce risk and improve insurability, are being introduced according to the sigma report.
However, much work remains. Governments need to respond swiftly in the wake of a disaster, when infrastructure is compromised and roads and bridges are washed out. Pre-disaster financing is a viable solution, because it makes funds immediately available to not only rebuild but to activate emergency responders such as firefighters and paramedics. Without this type of financing, the cost of recovery is inevitably borne by the taxpayer to make up revenue shortfalls and other critical services are often reduced or eliminated.
Ultimately, public/private collaboration is key to closing the property protection gap. Insurers can't act alone. We need supportive regulatory environments, risk information and in some cases, government involvement to extend coverage capacity.
After all, that prepaid debit card will only go so far.
Category: Climate/natural disasters: Disaster risk, Earthquakes, Floods/storms, Resilience
Location: Toronto, ON, Canada