Canadian Underwriter

P&C insurers call for a real estate climate risk score

October 26, 2022   by David Gambrill

Aerial view of a small town with several houses completely flooded. Consequence of climate change.

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Canadian P&C insurers are banding with Canada Mortgage and Housing Corporation (CMHC) to push for the disclosure of a real estate “climate score,” indicating the likelihood of a building or property being damaged during a natural catastrophe.

Insurance Bureau of Canada and CMHC released a report Tuesday calling for the adoption of real estate climate risk disclosure by 2025. The groups are pursuing options to integrate the climate score with the MLS property listings offered by the Canadian Real Estate Association.

“Imagine a credit score for climate risk,” said the report, Designing the Path to Climate Compatibility: Climate Risk Disclosure and Action in the Canadian Housing Context. “[It’s] a comprehensive score that offers an understandable and actionable account of a location’s susceptibility to catastrophic loss. It would allow all actors in the housing supply chain to respond consistently to climate risk.

“This process would start with understanding the risks and leads to managing the risk with consistent and persistent reduction of household, community and municipal risk, coupled with improved regional planning and emergency response capacity.”

Central to the idea of a universal, transparent climate risk score is that all industries connected to the building or property — insurance, banks, mortgage lenders, developers, real estate agents, and consumers — would understand the score and know what it means.

A sample calculation of a climate score in the report shows multiple measures involved — including the probability, frequency, and severity of the risk, as well as measures of climate resilience at the site, community and municipal levels. Municipal response to emergencies would also be a factor.

Real estate climate scores would be linked to an “action matrix,” which would include appropriate responses by all actors in the Canadian housing supply chain.

“Insights for action include [building] codes and standards, climate data, and tools including contextual guides for action against specific climate hazards,” the report notes.

Based on the action matrix, “lenders, insurers, municipalities and homeowners, [will] have an aligned view of risk and can understand how to invest in a property or community in order to reduce risk,” the report said. “Communicating this in an understandable and consistent way from all aspects of the housing supply chain is critical to achieving climate compatibility by 2050.”

Would a bad climate score lead to real estate values tanking in a particular area? That’s one obstacle facing the introduction of climate scores, the report notes.

“Consideration must be given to the negative impact that climate risk disclosure could have on property values in some locations,” as the report states.

Also, the action matrix “may include divestment and planned retreat” — in other words, not building in or pulling out of areas at high risk of being hit natural catastrophes.

The report provides immediate and medium-term (12-18 month) timelines for accomplishing actions leading to the implantation of the climate risk score.

Immediate steps include getting buy-in from all levels of government — federal, provincial and municipal — to make risk information available, identify risks, and help develop the action matrix associated with the climate scores.

In addition to pursuing climate disclosure on real estate sites like MLS, medium-term steps include:

  • Co-develop a consistent protocol of engagement for lenders and insurers
  • Collect and centrally communicate technical how-to data for the action matrix
  • Secure funding for data and adjust for current privacy laws
  • Establish or identify available products, programs, standards, or best practices to reduce risk.


Feature photo courtesy of Varavin