Canadian Underwriter

Feds’ task force reveals preferred flood insurance models

August 30, 2022   by Alyssa DiSabatino

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A federal government task force on flood insurance is leaning toward the public insurer and layered public insurer models of flood insurance programs for Canada.

The public insurer model features a Crown corporation that underwrites comprehensive flood insurance through the insurance industry as an intermediary, with an automatic government backstop. Unlike models in which a pool covers only high-risk properties, the Crown corporation would intervene in the insurance market by covering all overland flood risk in Canada.

“[This] is a public insurance approach, kind of like what they have through the National Flood Insurance Program in the United States, where a government entity would be offering insurance to owners of high-risk residences,” Craig Stewart, vice president of climate change and federal issues at Insurance Bureau of Canada, commented.

The layered public insurer approach, also called the public reinsurer program, builds on public and private-based elements of previous models. The provision of flood insurance occurs in two layers: The first layer provides the homeowner the option to purchase insurance from the private market at the full risk-based price, which must offer coverage up to a “modest” limit of $25,000. The second layer involves the mandatory purchase of flood insurance above this coverage limit up to a higher limit of $300,000 from the insurance industry. 

“[This] would be a partnership with the insurance industry, too, to essentially offer a revised flood product through private insurer channels to homeowners as a complement to existing policies,” says Stewart.  

These two options were among four that received actuarial analysis in the Task Force on Flood Insurance and Relocation’s report, Adapting to Rising Flood Risk: An Analysis of Insurance Solutions for Canada, released today. The task force is expected to make recommendations to the federal government in the fall.

Stewart said IBC, the association representing Canada’s P&C insurers, favours some form of public-private partnership. 

“We believe that, at the end of the day, insurers are the best-positioned to deliver insurance to their customers,” Stewart told Canadian Underwriter. “We think a seamless approach, where a homeowner doesn’t have to go to a separate provider…they can basically leverage their existing policy and add flood insurance…[is] best for the consumer.

“And frankly, we believe it’s going to be the most cost-effective for governments because why reinvent the product distribution and claims apparatus when it already exists, when we already have it?”

The task force found viable flood insurance arrangements should include the following policy objectives: 

  • Provide adequate and predictable financial compensation for residents in high-risk areas. 
  • Incorporate risk-informed price signals and other levers that promote risk-appropriate land use, mitigation, and improved flood resilience. 
  • Be affordable to residents of high-risk areas, with specific consideration for marginalized, vulnerable, and/or diverse populations. 
  • Provide coverage widely available for those at high-risk across all regions. 
  • Maximize participation of residents in high-risk areas. 
  • Provide value for money for governments and taxpayers. 

While six possible flood insurance models were originally up for review by the national flood insurance program’s task force, only four underwent full actuarial analysis: Flat Cap High-Risk Pool, Tiered High-Risk Pool, Public Insurer and Layered Public Reinsurer. 

According to its research, the task force says the public insurer and layered public insurer models are the strongest, relative to the policy objectives noted above. 

Among the two options the task force did not prefer:

  • The Flat Cap High-Risk model is based on a pool for high-risk homeowners, with minimal government intervention in the operating of the high-risk insurance market, but with significant support from governments to bring affordability through a single, relatively-low flat premium cap for high-risk properties.  
  • The Tiered High-Risk Pool is also based on a pool for high-risk homeowners, but with added government intervention. Rather than a single flat premium cap, estimated home reconstruction costs are used to divide high-risk homes into five equal shares. 

The task force’s overall evaluation found the Flat Cap High-Risk pool to be weakest option, based on its lack of alignment with the policy objectives. Tiered High-Risk Pool is marked as mostly average.

Looking at the risk reduction policy objective, the Flat Cap high-risk pool model would leave the most (31%) of all households uninsured. In the Tiered High-Risk pool model, about 23% would be uninsured.

In contrast, the public insurer model would leave only 5% of households uninsured. The public reinsurance model, with its layered nature, would see the number of total uninsured across the two layers land between the Tiered High-Risk pool and public insurer models. 

Backed up by this actuarial research, the task force will make a formal recommendation for a national flood insurance model to the federal government this fall. 

“It’s too early to say where the government will land, but they have zeroed in on two clear areas,” says Stewart. “Where they land will likely not be squarely on any one of those four options, they’ll probably be hybrid across them.

“The next step [will be] conversations around the federal cabinet table. And that will be federal/provincial/territorial ministerial discussions that will happen later this fall…Then there’ll be further conversations with our industry, and that together will result in probably a recommendation going forward for a route forward. We expect all of that to happen within the next six months.” 


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