Canada: Flood Risks: Significant, Frequent, And Difficult To Insure

Towards a national strategy to reduce flood risks

Storms, power outages, landslides, and road closures; as a result, last spring's floods in Quebec were identified as the weather event of 2019. Indeed, tens of thousands of residences and businesses were flooded, and an even greater number of citizens were affected.

Floods of varying intensity occur every year in this country. Major floods that cause the forced evacuation of residents represent a heavy economic burden that threatens the financial situation of the businesses and citizens affected.

How can we protect ourselves against such risk? First, it should be noted that most basic residential insurance policies do not cover damage resulting from floods caused by the overflow of a body of water. Such absence of coverage is explained by the fact that flood zones are clearly identified and that rising water is a foreseeable natural phenomenon, whereas the fundamental principle of insurance is that it covers "unforeseeable" situations.

For several years, however, certain land development has created vulnerable areas leading to inadequate drainage infrastructure. With the impact of climate change, the damage caused by water will likely continue to increase in frequency and significance.

Considering the proliferation of claims in this regard, some insurers have developed products to respond to consumer demand for insurance coverage specific to floods. Such coverage is nevertheless quite rare, and, when offered, generally carries high deductibles combined with low coverage limits. While coverage may be available for certain properties, those located in high flood-risk zones are almost never covered.

Citizens who sustain damage due to flooding, however, may be eligible for the Quebec public safety department's general indemnity and financial assistance program. The program was enacted by Order in Council on April 10, 2019, and aid may be granted, in particular, to compensate for the additional costs of accommodation and food during evacuation, of repairing or replacing essential personal property that was damaged, and of repairing damage to the main residence.

The program is now more restrictive than it was previously and includes several limits to the amounts that may be granted.

Nevertheless, when floods of the magnitude that affected Quebec in the spring of 2019 occur, thousands of citizens seek support from their government, which is then faced with a significant economic burden. Aid is therefore also available through the federal Disaster Financial Assistance Arrangements (DFAA), administered by Public Safety Canada, to compensate those who have experienced losses and to finance recovery.

Flood-related issues are a concern across the country. The federal government recently considered creating a low-cost national flood insurance program to protect homeowners at high risk of flooding who are without adequate insurance protection.

Similarly, in June 2019, the Insurance Bureau of Canada published a report titled Options for Managing Flood Costs of Canada's Highest Risk Residential Properties. After reviewing international experience, stakeholders analyzed three potential schemes that could be implemented:

• Option I: a pure market solution pursuant to which private properties would no longer be eligible for government financial assistance, and the risk would be borne by homeowners. Homeowners would therefore have to move, self-insure, or transfer their flood contingent liability to the private insurance market. Because premiums are risk-based, a portion of high-risk homeowners would opt out of the insurance market, and the government could invest in adaptive infrastructure.

• Option II: an evolved status quo in which the risk would be borne by a combination of homeowners and governments. As this option is the closest to the current state of affairs, the private insurance market would continue to provide insurance coverage in accordance with its risk appetite, and government aid would be provided in cases where premiums are too high. The government's exposure could also be reduced by transferring some of the risk to the global reinsurance market.

• Option III: create a high-risk flood insurance pool. A high-risk flood pool of properties would be separated from what is considered normally insurable risk. The group would be managed by a public-private partnership, administered by the insurance industry but governed and guaranteed by the government/global reinsurance market. The pool would need pre-capitalization to get up and running as well as ongoing capitalization that would be supported by premiums paid into the pool and levies assessed on all homeowners or municipal ratepayers and financed by levies or through government contributions.

The governments of other countries have already implemented similar measures to address the issue of the insurability of flood risk. The United Kingdom has launched Flood Re, a reinsurer subsidized by a levy imposed on all insurers that offer home insurance. The United States created the National Flood Insurance Program (NFIP) in 1968. To benefit from NFIP flood insurance, the property must be located in a community that participates in the program and that agrees to apply sound floodplain management standards. In some cases, NFIP premiums may be subsidized.

The complete withdrawal of government aid would allow the government to focus on mitigation rather than disaster management, an area in which insurers are generally more efficient, but could also lead to avoidance by homeowners, who may simply choose not to purchase insurance and risk financial ruin in the event of loss. Conversely, placing too much emphasis on the availability of insurance (by subsidizing premiums, for example), creates the possibility that the premium rate paid will not reflect the full risk of loss and that the funds available in the event of loss will prove insufficient.

In short, regardless of the perspective from which the issue is addressed, the allocation of costs among citizens, their insurers, and both levels of government after a flood is a significant challenge. For that reason, all participants must increase their efforts to implement measures that are preventive, rather than corrective. Whether that consists of elevating critical equipment (heating, ventilation, electrical transformers, communication systems, etc.) in commercial buildings above expected flood levels or even using technology that allows buildings to float above water during a flood, there is no doubt that improving infrastructure and implementing preventive measures will contribute to reducing the risk and, in so doing, make it somewhat more insurable.