Insuring for Climate Change

Vanessa Lam considers how the federal government might respond to climate change.

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The devastating floods of 2016 in Sydney and of 2013 in Calgary and in the Greater Toronto Area highlight the risks of climate change in Canada. Since climate change is expected to result in more frequent floods of greater severity, the federal government has an interest in finding sustainable options for overland flood disaster recovery.

At present, the Government of Canada spends increasing amounts of taxpayers’ money on flood recovery efforts through Disaster Financial Assistance Arrangements. This financial assistance is an important resource for provinces recovering from natural disasters. However, this spending is becoming problematic. Canada’s Parliamentary Budget Officer has reported that flood recovery represented 75% of Disaster Financial Assistance Arrangements spending and cited a lack of overland flood insurance for property owners among the causes of this expense. Since property owners do not have overland flood insurance, Disaster Financial Assistance Arrangements cover expenses that might otherwise be covered by insurance, including the repair and restoration of primary residences and small businesses.

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Overland flood insurance was not available in Canada until 2015, when a single insurance company offered coverage for freshwater, but not saltwater, overflows. Insurance companies are hesitant to offer overland flood insurance because overland flooding traditionally affects a fraction of the Canadian population. Since the demand for overland flood insurance is low and purchasers presumably live in areas more prone to flooding, insurance premiums would be unaffordable as the risk is not spread across a large enough population of persons paying insurance premiums. Further, the federal government stopped mapping floodplains in 1998, thereby eliminating an important risk assessment tool that insurance companies would want access to in order to make relevant risk calculations. The available data is outdated and this makes it difficult for companies to price premiums in a way that is both affordable for consumers and profitable for companies.

We might be tempted to think that more frequent flooding will make overland flood insurance more attractive to consumers and, as a result, insurance companies. However, insurance companies are already seeing the price of climate change. Natural disasters are on the rise, including increased risks of earthquakes and wildfires, which result in damages that insurance companies have already committed to cover. As a result, insurance companies pay out more often than they would like. Taking on additional risk by offering overland flood insurance is unattractive and potentially unfeasible for Canadian insurance companies.

Despite these risks, insurance companies are willing to offer overland flood insurance if the federal government is willing to provide certain supports. The Insurance Board of Canada has called for a national flood program due to a recent increase in flood activity. They suggest two major actions the federal government could take to make overland flood insurance profitable for insurance companies, which, in turn, would make this insurance more accessible to consumers and help to reduce Disaster Financial Assistance Arrangements spending on flood recovery. These suggestions include: the restoration of the floodplain mapping program followed by investment in flood mitigation, such as water diversions and water channel improvements. As well, there is a desire for ongoing consultation with the insurance industry.

The insurance industry is motivated by pressure from citizens, especially former flood victims, and a strong desire to avoid even more stringent regulation. To date, the federal government has not responded to the industry’s call for support and continues to use taxpayer money to fund flood recovery efforts through Disaster Financial Assistance Arrangements.

Given the high Disaster Financial Assistance Arrangements expenditures and the increasing frequency and severity of floods, it makes good financial sense for the federal government to invest in flood plain mapping and flood mitigation. This could help provide much needed support to flood victims, while also reducing the spending on flood relief through Disaster Financial Assistance Arrangements. The fact that this government spending would make overland flood insurance more profitable for companies, and more affordable for consumers, is a convenient by-product of this spending.

The federal government should take advantage of the insurance industry’s willingness to offer overland flood insurance. It should consider using public funds to better understand and then mitigate the risk of flooding. This in turn could make overland flood insurance more affordable for all.

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Vanessa Lam is a Ph.D. Student in the Department of Philosophy at the University of Waterloo @vanessayyLam