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Your Uninsurable Home? What is climate change’s wild weather doing to insurance?

Across Canada, this year has brought severe storms, floods, wildfires and other catastrophic weather. As people in Calgary, Toronto and other hard hit areas try to rebuild their lives, most of them expect that someone should help them pay for the damage. Oil-rich Alberta has promised $1 billion to support the first phase of recovery and reconstruction. (The actual cost is likely to be much more.) But most people, in most places, need to rely on insurance when disaster strikes. What will happen when they cannot get it?

For the last decade, property insurers have been leading business voices about the urgency of climate change, because they bear the brunt of catastrophic weather sooner than most other businesses. The year is less than two thirds through, but Canada’s largest insurer, Intact, is already predicting hundreds of millions of dollars in after tax losses. This will make 2013 one of the costliest years ever for severe weather claims.

Insurers are private businesses, not charities, and if they cannot make money underwriting risks, they will stop doing it. Although flooding has become the largest single category of property losses, most Canadian insurers don’t offer overland flood insurance, at least on standard insurance packages. Sewer backup insurance is still available to most homeowners, at least for now. But people who have already had one sewer backup claim may not be able to buy backup coverage again.

The Climate Change Adaptation Project at the University of Waterloo, has published a sobering report on adaptation challenges associated with climate change’s severe weather, Climate Change Adaptation: A Priorities Plan for Canada Adaptation, in this context, means adjusting social practices, processes and structure to better cope with the changes that climate change is bringing.

One area that urgently needs adaptation is property and casualty insurance, the type of insurance usually called on due to severe weather. Prof. Blair Feltmate, the Project Chair, warn that we may be heading for an uninsurable housing market. Climate change is making the likelihood of severe weather damage – particularly due to flooding – so high that property insurance against it may become too expensive, or unavailable at any price. This may have a drastic impact on property values, and on the many people whose lifetime savings are invested in their homes.

Can climate adaptation keep insurance accessible?

Insurance pricing is based mainly on an actuarial estimate of the risk transferred from the property owner to the insurance company, and on the pool over which this risk is spread. Since adaptation aims to reduce the cost of property damage due to severe weather, it could, potentially, keep the cost of insurance down. The Report recommends action in a number of key areas: build new homes better; make existing homes and infrastructure more resilient, and get much better data on which properties are most vulnerable to weather related losses, then price insurance accordingly.

For example, changes to the National Building Code could require weather-hardened infrastructure that can better, forgive the pun, weather the storm. We should also get serious about reducing the urban runoff that contributes to flooding, through downspout disconnection, tree planting, green roofs and permeable pavement. Even small changes can reduce disaster costs, such as programming elevators to use an upper floor (not the ground floor or basement) as their default position.

And we should stop building new homes in areas that are going to flood (which means we need up to date flood plain maps). Alberta has already announced one step in the right direction: those who choose to rebuild in a floodway will not qualify for future flood-related disaster assistance. The province will put a note to this effect on the title to the affected properties.

What about pricing?

More sensitive insurance pricing (affected by specific risks and risk reduction measures) can also play an important role, encouraging Canadians to invest in adaptation and helping insurers to prepare. As the Report explains, an accurate price for insurance serves two critical purposes in mitigating the risk of extreme weather and climate change:

First, the price of insurance provides homeowners and businesses with an ongoing measure of their risk of damage. High prices, or price increases, mean that a property is at a greater risk of damage. These prices should encourage consumers to take actions that reduce their exposure to risk, which will be rewarded by a lower price for insurance coverage. If the insurance price is too low, consumers may be unaware that they are exposed to significant risk. If the price is too high, consumers may spend money on unnecessary actions to reduce risk exposure.

Second, the price of risk needs to be accurate so that insurance companies can compensate consumers in the event that their property is damaged through extreme weather. If the price of insurance is too low, insurers will not have collected enough capital to compensate all of their clients. In these circumstance, not only is an insurer unable to help their clients recover, but in extreme circumstances, the insurer faces the risk of insolvency. In other words, insurance coverage is no longer available.

New Climate Reality

When severe weather strikes, having insurance can make all the difference between recovery and disaster. With climate change increasing the frequency and severity of wild weather and the property damage that goes with it, losing access to insurance could have a huge impact on many lives. Most Canadian governments can’t afford to replace the private insurance market if it decides to walk even further away from flood-prone properties. Keeping severe weather insurance accessible will take hard work and an integrated approach by industry, insurers and government – and a hard-nosed realism about pricing, risk, and climate change. It’s time we got at it.

Dianne Saxe and Meredith James

This article was first published on SLAW.

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