Disaster-Proofing Canada: Learning from Floods and Fires

(Lapo Calamai, Director, Catastrophe Risk and Economic Analysis, Insurance Bureau of Canada (IBC))

Disaster-proofing Canada: Learning from floods and fires

Few Canadians will ever forget the images from May of this year of cars filled with families inching down Highway 63 away from Fort McMurray against a backdrop of flames.

At its peak, the Fort Mac wildfire covered 500,000 hectares – an area larger than Prince Edward Island. Firefighters dubbed it “The Beast.” In the two months before The Beast was brought under control, it destroyed 2,400 homes and buildings, and thousands of vehicles.

Within hours of the event, property and casualty (P&C) insurers activated emergency response plans, and the insurance industry is now responding to 44,000 claims totalling about $3.8 billion, making this the costliest insured disaster in Canadian history.

The wildfire that tore through northern Alberta stands as an important reminder that disaster can strike anywhere, with little warning. And Canada must be ready.

Canadians, governments and businesses can work together to prepare, so that when the worst hits, whether it’s a flood, a fire or an earthquake, those affected will get back on their feet quickly. Insurance Bureau of Canada (IBC) and its members are making it a priority to look ahead and anticipate ways to ensure Canadians are adequately protected. We call this “disaster-proofing Canada.”

Learning from past disasters – From Slave Lake to Fort McMurray

Every disaster holds lessons that can be applied to the next event. Before Fort Mac, Canada’s last large fire also happened in Alberta, in Slave Lake in 2011. Some 400 homes were destroyed – about one quarter of what was lost in Fort McMurray.

Back in Slave Lake, each insurer tackled the debris cleanup individually. But they quickly discovered that this “business-as-usual” approach simply couldn’t work given the scale of disaster: backhoes and bulldozers competing to access the same roads, properties and landfill sites. It wasn’t long before insurers realized that economies of scale and scope needed to be harnessed. The solution? Coordination and cooperation. Not an easy task for an industry made of over 200 highly competitive insurers – but essential nonetheless.

The scale of the task in Fort McMurray was even greater: not 400, but 2,400 homes – the largest number destroyed in any wildfire in Canada’s history. Building on their Slave Lake experience, however, insurers recognized that they needed a coordinated response. The municipality saw the value in coordination as well, but was very sensitive to the need to hire local, considering the tough economic times that the community was already facing before the fire.

IBC helped coordinate action, hiring a project manager to find a local contractor with the experience to handle the cleanup. The result? Today the vast majority of sites – some 98% – have been cleared, and the focus is now on getting ready for rebuilding and restoration come spring. An impressive result to achieve in just about three months given the unprecedented scale of the disaster.

Mitigating the cost of natural disasters through adaptation

While Fort Mac will forever mark the history of our country, it was hardly an isolated event. For several years now, insurers have been witnessing first-hand the growing impact of extreme weather events.

Evidence-based research clearly shows that climate change is contributing to an increase in wildfires, storms, flooding and severe weather activity – even in areas that were previously thought to be “risk-free”. And of all natural disasters, water is no doubt the long-term trend. Data unequivocally points to water-related damage having replaced fire as the number one cause of home insurance losses.

By taking preventive measures, Canadians and their governments can go a long way to protecting themselves, their communities and the national economy from the future impacts of disasters.

With flood being the country’s most frequent and costly disaster, IBC is currently in talks with federal and provincial governments to co-create a national flood strategy – in partnership with likeminded stakeholders in the academic and not-for-profit world.

Governments are well aware of the fiscal pressure generated by increased flooding. Average spending under the federal government’s Disaster Financial Assistance Arrangements (DFAA) – the program that provides reimbursement for large catastrophes – jumped from an average of about $40 million a year in the 1970s to more than $600 million a year in this decade. The Parliamentary Budget Officer (PBO) expects this to increase to over $900 million a year going forward. The vast majority of it – some 80% percent – is due to flood.

With the 2013 southern Alberta floods, DFAA costs reached a record $1.4 billion. This spending came directly out of the Canadian taxpayer’s pocket. In addition to that, the Alberta government incurred another $1.5 billion in disaster assistance costs, bringing the total cost to taxpayers for floods that year to about $3 billion. And this was of course on top of the $1.9 billion shouldered by the insurance industry, and the value of economic activity and production capacity that got wiped out in the process.

A key reason for the cost escalation experienced by governments across Canada is that there is currently no system in place to ensure that all victims of flooding events have adequate financial protection. And Canada is alone among G7 countries in this respect.

Insurance coverage for residential overland flooding has not historically been available in Canada, partially as a result of insufficient flood mapping data. With improvements in underwriting, modelling and risk assessment technology, however, this is now changing. Several insurers today offer residential flood insurance across the country.

Although flood coverage is still a relatively new product, we expect that ultimately it will be available for all but roughly 10% of Canadian homes. That 10% represents the properties at the highest risk of flooding. These homeowners have the greatest need for flood insurance but are unlikely to be able to obtain it without some form of public-private coordination. With risk-based premiums, which are critical for setting proper incentives and nudge consumers towards investment in risk-mitigation, high-risk properties would inevitably face an affordability problem.

As we witnessed this past Thanksgiving in Atlantic Canada, however, we are still a long way from ensuring that every Canadian has access to the financial protection they need to respond to floods. More needs to be done – and government has a critical role to play.

Along with this public-private coordination, IBC is advocating for new investments to make public assets more resilient to extreme weather, updated building codes, more stringent land use policies, individual and community-based home adaptation programs, and a host of flood mitigation initiatives based on both structural flood defences and natural infrastructure.

As Canadians will continue to face an ever increasing number of disasters, we must continue to focus on improving how we respond to help communities like Calgary, High-River or Fort McMurray get back on their feet. We must look forward to how we can adapt and reduce the impact of the next catastrophe. Disaster-proofing Canada demands we do both. 

Written November 30, 2016

References:

• A Primer on Financial Risk from Natural Disasters: The Case for Public-Private Collaboration - ​This paper provides a primer on the private disaster risk market and is designed to provide government officials with an understanding of how the private market functions in this area.

• The Financial Management of Flood Risk – An International Review: Lessons Learned from Flood Management Programs in G8 Countries.

This blog post has been written by Lapo Calamai, Director, Catastrophe Risk and Economic Analysis, Insurance Bureau of Canada (IBC). Having joined IBC in 2012, Lapo leads research, analytics and policy development to address some of the industry’s most pressing financial, regulatory and commercial challenges. He also leads IBC’s catastrophe risk management practice, working with governments and insurance executives across Canada to promote sound disaster risk management by leveraging risk transfer and catastrophe insurance and reinsurance solutions.

Lapo Calamai is a panelist at CatIQ’s Canadian Catastrophe Conference (C4 2017) on the Perspectives in Flood Risk Assessment and Mitigation workshop during the conference.