Resilience is Everyone’s Responsibility

(Veronica Scotti, President & CEO, Swiss Re Canada)

The insurance industry is fully capable of meeting its obligations in the wake of the Fort McMurray fire, yet the assets lost are a sobering reminder of the ferocity of nature’s perils and our vulnerability. 

Replaying the scenes of the devastation in my mind, I’ve been thinking about how resilient we really are – both physically and financially. Are Canada and its citizens equal to the challenge of extreme events like Fort McMurray? What about other events such as earthquake and flood? I think there's work that can and should be done. 

My colleague, Christoph Oehy, former Head Treaty Underwriting, and I share a passion of wanting to raise the odds of Canada's preparedness for when the next flood strikes. Over the past year, we've discussed, at length, what we think is needed for that to happen, and how we can help. Those conversations are now compiled in a report Christoph co-authored with our flood peril specialist, Caspar Honneger. The road to flood resilience in Canada explores the consequences of a 200-year event and recommends steps to close the protection gap – the difference between economic and insured losses. 

Our research estimates that Canada’s property protection gap is CAD$2.9 billion – the 11th highest in the world. It’s a sad fact that few homeowners have flood insurance. One major event could result in damages that far outstrip the level of insurance available in the market. We only need to look back a couple of years for a vivid illustration of this problem. In 2013, insurance only covered about one-third of the economic losses from the southern Alberta floods and CAD$1 billion of the nearly CAD$1.5 billion in total losses from the Toronto flood.

So what’s causing this protection gap? There are many reasons, but let’s look at two very important factors. First, there’s a general misunderstanding (or assumption) that the government will step in and pay for extensive repairs and replacement, which leads to complacency about the need for insurance. Second, insurers have been hesitant to take on flood risk due in part to inadequate modelling skills and no clear actions to continuously mitigate exposures, which homeowners and municipalities are in charge of.

Ignorance and maintaining the status quo are no defense against the very real threat of a 200-year flood. Consider the following river flood projections based on a model developed by our catastrophe peril experts:

- A 200-year flood in Ontario is likely to be triggered by heavy precipitation and inadequate urban drainage, resulting in total losses approaching CAD$5.3 billion -- CAD$4 billion of that is uninsured at the moment.

- A 200-year flood in Alberta could destroy CAD$3.6 billion in property -- CAD$2.6 billion of that uninsured -- caused by excessive snowmelt on the Bow and Elbow Rivers which converge at Calgary.

- In British Columbia, development along the Fraser River would exacerbate already tenuous flood conditions in the event of a heavy snowmelt, triggering CAD$4.6 billion in losses of which CAD$2.8 billion isn't covered by insurance.

Those are just a few examples. As you can see, the culprit varies depending on geography, topography, climate, population, development and local infrastructure. 

Canada's the only G7 country today that leaves homeowners largely unprotected from the financial losses caused by floods, and still relies on post-event measures, which are sincere but ineffective and certainly unsustainable. So what will it take to change the multi-party conversation on the flood file and close the flood protection gap through planned actions? You’ll find our recommendations in the report, but here’s the general idea: It will take partnership between the public and private sectors to satisfactorily address the need for physical resilience, social resilience and economic resilience (all three are important). Insurance can lead the way to higher economic resilience through improved modelling, product innovation and application of behavioural economics toward better understanding consumer attitudes and motivations when it comes to the perceived value of insurance. A clear appreciation for the value of insurance is directly linked to 1) a well-informed choice when selecting coverage and 2) in assuming responsibility through very simple and inexpensive risk mitigation measures that can save thousands of dollars in losses as well as emotional distress. 

I encourage you to read this report – while it's scientifically sound it's also an easy read. And you can always reach out to us through this blog if you have questions or tips on how to make the dialogue richer and the actions more compelling. I'm convinced we can make a difference if we all take responsibility.

And if you’re having some of these same discussions with colleagues, please let us know. That's how it all started for Christoph and myself a year ago in our Toronto office.

This article was originally posted on Swiss Re's Open Minds Platform.

Swiss Re Canada is a proud sponsor of CatIQ's Canadian Catastrophe Conference (C4 2017) that is taking place February 1-3 at the Allstream Centre located in Toronto. Balz Grollimud, Head Treaty of Underwriting at Swiss Re will be speaking during the Geomagnetic Storms - The Next Black Swan session at the conference.

Model Flood Risk Without Historical Data – An Innovative Solution!

(Carl Lambert, Vice-President of Business Intelligence at The Co-operators)

In June 2013, Canada suffered one of its most severe floods in recorded history. 32 towns in southern Alberta were flooded for total damages exceeding C$5 billion. At the time, the insurance industry did not offer flood insurance.  Sewer backup losses were covered and the total cost for the industry was C$1.7 billion. Yet, in early 2015, Canada remained the only G7 country where residential flood insurance coverage was not available.

At Co-operators, we were already working on launching a flood product.  Those events reinforced the demand for residential flood coverage and put more pressure on the industry to develop a solution.

The Co-operators was the first in Canada to launch such a new coverage. Significant effort was required across the organization to ensure we implemented the proper solution that would answer an unmet need, while focusing on making Canadian communities more resilient to flooding. This blog will focus on only one piece of the work, the development of the risk assessment and the pricing. The BI-Research team and Actuarial pricing team collaborated on a non-traditional pricing solution. 

The Approach - Research

Learn & Partner with Canadian Universities

We started by reaching out to our network of partners in Canadian universities. This helped us better understand important concepts around flood hazards, flood plains, and damage functions. Our Statisticians and Actuaries have learned to work with Hydrologists, Geologists, Hydraulic Engineers and Civil Engineers.

Seek out Third Party Vendors

We then started a long process of seeking out and assessing existing flood models and data sources. We learned to speak with modeling firms, and gradually built enough expertise internally to be able to assess the credibility and value of third party vendors.

Leverage Open data & Big Data

We then sought out external available data.  There is a lot of information available and the challenge was to identify the ones that are usable for that purpose.  By usability of information, we mean reliability, predictability and frequency of updates.  

We have tested dozens of external sources and a significant number of them have been used.  For example, we used elevation data at every 5 meters Canada Wide.  (30 meters in rural areas).  We also used the Soil type across Canada to better model water dispersion and evaluate how long the flood will last.  We also used Historical River flows, with numerous lecture points of all rivers in Canada, available every minute, for at least 50 years.  We even used a database showing historical Tectonic Plates movements.

Assessment of the Risk

There were three sources of flood risk to model: Fluvial flood, pluvial flood and coastal flood. Each of them has their own specificities and therefore have different models.

It was important for us to provide adequate and flexible coverage for all Canadians, whether they are in a high risk zone or not, at a price that accurately reflects the true risk. For that reason, we needed a model that was accurate, precise, and consistent.

Our model is customized to use different sources of insight that complement each other. Vendor models will sometimes fail our quality standards and, most of them also ignore a significant amount of local flood defense structures such as dikes and reservoirs. On the other side, our internal models were not always based on enough data to be fully credible. 

With extensive R&D efforts, we were able to leverage the large amount of data available in Canada to bridge that gap and create a national flood risk model that meets our standards.

Assessing the risk means developing models for the following 3 phenomena:

Model Flood Water amounts

Hydrological models are used to determine the probability that a water body will flood. 

Model Water Dispersion

Hydraulic models are used to determine how those water volumes flood the landscape. 

Model the « submersion depth »

Submersion depth models use the results of water dispersions and combine them with other sources of information to determine models for submersion. Furthermore, the required use of rooftop geocoding of the exact location of the insured building complicated the availability of information since many possible sources did not have the geocode.

Convert the « submersion depth » into building & content damage

Many factors impact the amount of damages:  the submersion depth, the type of building, the expected duration of the flood, the temperature of the water and many more. In order to build both content and building predictive models, we have used text mining on notes coming from past sewer backups claims and integrated that with external probabilistic models. 

Pricing Policies

Flood models estimate the flood risk but they don’t calculate an insurance premium. For example, third party damage curves work well at estimating flood damage but cannot be directly applied to insurance claims, because the latter includes elements of client behavior as well as the effect of limits and deductibles. Furthermore, our comprehensive water insurance product offers our clients unprecedented flexibility regarding their water coverage, which also provided pricing challenges. In times when the “buzz word” in technology and science is Minimal Viable Product, in the case of flood insurance the bar for a viable product is very high.

In the end, a key to our success is to take a scientific approach to modeling the flood risk, for each and every house, farm, and building. It is what allows us to provide insurance at the right price, for everyone. It is that analytical mindset, combined with a lot of determination and innovation, that is and will continue to be the Co-operators’ advantage. 

This blog post has been written by Carl Lambert, who is vice-president of Business Intelligence at The Co-operators. Carl completed a Master's degree in Actuarial in 1994. He joined The Co-operators in 2009, where he launched a Research team that now consists of over 65 professionals in Mathematics, Statistics, IT and Actuarial. The team is responsible for the development of Analytics throughout the organization.

Carl Lambert is a panelist at CatIQ’s Canadian Catastrophe Conference (C4 2017) on the How to Create an Inventory of Canadian Hazard Data session during the conference.

Average Annual Cost of Federal Disaster Assistance due to Weather Events

(Rod Story, Financial Advisor/Analyst, Financial Advisor-Analyst at the Parliamentary Budget Office)

The Disaster Financial Assistance Arrangements (DFAA) program, created in 1970, reimburses the provinces and individuals (via the province) for expenses and damages resulting from disasters, natural or manmade. The program shares costs with the provinces on an increasing proportion up to the level reached at $15 multiplied by a province’s population. Above this amount, the DFAA program pays 90 per cent of the costs.

For this report, PBO obtained historical DFAA payment data directly from Public Safety Canada (PSC) rather than using PSC’s public disaster database. The public database is missing some disaster payments and some other listed payments are incorrect due to payment changes not being updated in the database. Therefore, the DFAA numbers used in this report are not the same as those found in the disaster database.

As shown in Figure 1, over the past five years DFAA’s liabilities have increased substantially because of a number of weather events that have caused heavy damage. As a result, DFAA’s annual transfers to the provinces have been much higher than its nominal appropriation of $100 million (Figure 2).

It is important to note that when a disaster occurs, DFAA in general books the liability in the year of the disaster recognizing its financial obligation. Yet, the actual transfers to the provinces for disasters can take place upwards of eight years after the event. This explains the large estimated transfers shown in Figure 2 going out to fiscal year 2017-2018.

Figure 1: DFAA liabilities

Source: Public Safety

Figure 2: DFAA annual transfers

Source: Public Safety

Note: *Public Safety estimates

In the fiscal year 2012-2013, DFAA transferred $280 million to the provinces; by 2013-2014, this had increased to $1.02 billion and $305 million in 2014-2015. DFAA estimates its transfers resulting from previous events will be higher in subsequent years ($848 million in 2015-2016, $590 million in 2016-2017, and $580 million in 2017-2018).

This report estimates the expected additional average annual cost to the DFAA program resulting from anticipated weather events (floods, hurricanes, convective storms, and winter storms) over the next five years.

PBO used data from numerous sources, including the Insurance Bureau of Canada (IBC), DFAA, Swiss Re, and Risk Management Solutions Inc. (RMS), to determine its estimate. For losses due to hurricanes, convective storms and winter storms, PBO used estimates provided by RMS. For losses due to flooding, PBO used estimates from IBC. RMS had Canadian specific models for hurricanes, convective storms and winter storms. The IBC flood estimate used a Canadian specific flood model based on Canadian flood extent and flood risk.

PBO estimates that over the next five years, on average, DFAA can expect annual costs of $229 million per year because of hurricanes, convective storms and winter storms. Using the IBC estimate for flood losses, PBO estimates that on average, DFAA can expect annual costs of $673 million for floods. Therefore, the total annual costs to the DFAA for weather events are estimated to be $902 million.

The results are listed in Table 1 and Figure 3 below. It is important to stress that these values are averages; in any given year, the losses can be much higher or much lower.

Table 1: Estimated DFAA annual weather event costs

Sources: PBO; RMS; IBC; DFAA and Swiss Re

Therefore, based on the estimated annual DFAA payments for future weather event shown in Table 1, the DFAA will continue to require more than its nominal $100 million appropriation.

Table 1 also shows that the DFAA costs resulting from floods are the largest of the weather events at $673 million and represent 75 per cent of DFAA’s weather expenditures. This high value is partly due to the lack of flood insurance in Canada, as well as regulatory challenges in the Prairie Provinces. Over the past 10 years (2005-2014), Manitoba, Saskatchewan, and Alberta have accounted for 82 per cent of all DFAA weather event costs, almost all of which are a result of flooding.

The Prairie Provinces face regulatory challenges of reduced enforcement and compliance when floodplain management is the responsibility of municipalities.

Figure 3: Estimated DFAA annual weather event costs

Sources: PBO; RMS; IBC; DFAA and Swiss Re

Furthermore, Saskatchewan has unlicensed drainage of wetlands that increases peak flows during floods and Alberta appears to have inaccurate flood maps. Furthermore, in creating flood maps, Alberta does not take into account rising groundwater and debris floods on steep mountain creeks.

One last consideration is interprovincial co-ordination of flood management. This currently does not exist in Canada even though it has been shown to be effective at reducing damages in other countries. This is particularly important in the Prairie Provinces where rivers such as the Saskatchewan and its tributaries span all three provinces.

To read the full report, click here.

This blog post has been written by Rod Story, who is a Financial Advisor-Analyst on the Expenditure and Revenue Analysis team at the Parliamentary Budget Office (PBO). Rod has a PhD in Management (Finance) and an MBA from Carleton University as well as a BASc from the University of Waterloo.

Rod Story is a panelist at CatIQ’s Canadian Catastrophe Conference (C4 2017) on the Disaster Assistance session during the conference.