Canadian Underwriter

Is it time to revisit flood coverage?

July 5, 2013   by Terri Goveia

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Is it time to revisit flood insurance? As industry members and authorities in Australia prepare to review coverage in the wake of disastrous flooding in Queensland, many are beginning to ask similar questions here.

Earlier this week, both Queensland’s premier, Anna Bligh, and the Australian prime minister called for a review of flood coverage. In announcing an inquiry into the disaster, Bligh stressed that the review would include insurance, noting that, “we need to learn the lessons of this event so that we can protect ourselves better in the future.” In Canada, images of severe flooding in New Brunswick and Nova Scotia are still fresh–and some industry groups say its time to review coverage here.

Floods are making headlines here more often, and the issue has become more complex than it was in the past, says Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction (ICLR). “Urban flooding is becoming a bigger and bigger problem,” he notes. “It [often] has nothing to do with rivers bursting their banks.”

A potential solution?

At the heart of the discussion: extended coverage for flooding in Canada. In late 2010, the ICLR and Swiss Re released a joint discussion paper that examines the possibility of extended coverage, and outlines how the industry might be able to offer it. With joint government-industry-homeowner effort, it can be a reality, according to the paper, Making Flood Insurable for Canadian Homeowners.

“We would have to get back in the business to determine hazards, risk and pricing,” says McGillivray.

Such coverage–ideally, bundled flood coverage for low-risk homeowners–would require better flood hazard mapping and more flood control investments from government, better public awareness of flood risks, and more participation from homeowners in keeping their properties flood-ready. Insurers would all need to participate in the flood insurance market and use risk-based premiums to make it viable, the report stresses.

Is it possible? Any discussion must address market considerations: would policyholders in low-risk areas even want it? And would the pool be weighted with high-risk consumers, making the coverage unaffordable?  “Although this cost could be spread around by forcing every policyholder to pay for flood coverage within their home insurance policy, the people not living in flood prone areas would likely think that it was unfair to require them to subsidize consumers in high risk areas,”  says Insurance Bureau of Canada (IBC) spokesman Mark Klein.

The necessary cooperation from all government levels, and uncertainty over the potential for flood claims are also considerations he adds. “Given the present state of knowledge about climate change, there is no way to predict how quickly flood claims would grow in number and severity within only a few years.”

Both brokers and the IBC agree that talks must include all stakeholders. “There is a serious problem with flood insurance across the country that must be addressed,” Steve Masnyk, spokesman for the Insurance Brokers Association of Canada (IBAC) told Canadian Insurance Top Broker via email. “A thorough national discussion needs to group together all players, insurers, brokers, governments. IBAC believes that there needs to be a private sector solution to this problem.”

Overlapping issues

Although Australian insurers cover floods in most instances–stormwaters are covered in most cases, but so-called inland flooding isn’t–some of the issues it faces as it revisits coverage overlap with those up for discussion in Canada. “Both the insurance industry and the different levels of government all need to work on to see some form of consistency and a better understanding in the community about what they are protected for and what is excluded,” Queensland premier Anna Bligh said during a January 17 press conference.

Talks on policyholder education are already underway here. The ICLR is slated to talk to IBAC about sewer back up issues this week, and for policyholders, “a lot communications begins and ends with insurance brokers,” McGillivray notes.

But for discussion to turn into industry-wide action on new flood coverage, the homeowners’ line would likely have to return to profitability, he says. Though he acknowledges that “it’s a big leap,” he notes that other Western countries insure flooding–“the argument that only people at risk want it, that doesn’t [hold up],” he points out–“every country has anti-selection and has dealt with it.”

With the costs of flooding mounting everywhere–as of January 14,  Australian insurers had received 7,000 claims, and Guy Carpenter predicted that damages there would exceed $6 billion–action may come sooner than later.

In Canada, stakeholders are at “the end of the beginning,” McGillivray says. “We’ve had positive feedback from the industry… it’s not going to be an easy discussion, but we have to get it started.”

This story was originally published by Canadian Insurance Top Broker.