Canadian Underwriter

Catastrophe loss mitigation: Saving What We Have

June 1, 2000   by Sean van Zyl, Editor

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Included in the federal government budget for the current fiscal year was a long-range allocation of several billion dollars to be earmarked for provincial infrastructural development projects. The property and casualty insurance industry’s recently formed Institute for Catastrophic Loss Reduction (ICLR) has called for an ambitious $750 million of this expenditure to be allocated by the various provincial governments toward natural disaster mitigation. And, while Ottawa and the provincial governments have a poor past record with regard to disaster prevention, the ICLR believes concerted global initiatives on catastrophic loss mitigation launched over recent years could well see a positive change in the policies of the Canadian governments toward disaster prevention.

Based on a five-year joint government/private sector plan, the property and casualty insurance industry’s Institute for Catastrophic loss Reduction (ICLR) is hoping Ottawa and the provincial governments will set aside approximately $150 million a year of their infrastructural budget expenditure toward ensuring against future natural losses. This strategy, which the ICLR is lobbying to have established as part of a national plan on loss mitigation, is based on similar expenditure allocations of 15% made in the U.S. through the federal government’s disaster recovery agency, FEMA.

Terry Squire, chairman of the ICLR, observes at the institute’s recently held annual general meeting (AGM) that the insured cost of the 1998 ice storm continues to rise. The total paid out by insurers as a result of the ice storm has risen to $1.6 billion, he says, with more than 800 claims having been submitted — from a claims handling perspective this dwarfs that of Hurricane Andrew which is regarded as the most costly natural disaster to have struck the U.S. “The ice storm directly affected more than 4 million Canadians…The experience [the ice storm] reinforces our early work that Canadians are good at disaster response, but we need to invest in prevention.”

During the year past, the ICLR entered into a funding partnership with the University of Western Ontario (UWO) in research of natural disaster planning, Squire says. This partnership will greatly advance the institute’s research base, he adds.

Compiling accurate research remains a critical component of the ICLR’s lobbying activities with Ottawa and the provincial governments, comments Paul Kovacs, the executive director of the institute. The past two years since the establishment of the ICLR has seen the insurance industry rise to become a credible source of natural disaster data to governments, he observes. In addition, in the spring of last year, the ICLR conducted a national poll through research agency Pollara of approximately 1,600 Canadians to gauge public opinion toward investment in natural disaster prevention — the results of which were extremely favorable, Kovacs notes (see Pollara charts). Until recently there had been no concerted means to identify national public opinion to disaster prevention nor to related expenditure planning. Armed with strong public support and extensive research into natural disasters in Canada, the ICLR believes the time is now right to push the governments on investing in loss mitigation.

The problem at hand

On a global basis the costs associated to natural disasters has been doubling every five years since the beginning of the 1960s, Kovacs points out. And, while Canada was fortunate over much of that period in escaping mega catastrophe events, the past decade has seen a significant shift in trend with at least four major events having occurred, the government and insured cost of which has run into billions of dollars. The result of which has seen the cost to Canadians and insurers on disaster recovery double every five years since the beginning of the 1980s — placing Canada in line with international trends.

The reasons behind the rise in incidence and cost of natural disasters lies in rapid urbanization, increased per capita wealth, reduced government infrastructural expenditure, and the fact that global weather patterns are indeed changing for the worse, Kovacs explains. While there is little that can be done by insurers to improve the weather, considerable effort can be made to avoid losses by reducing exposure through ongoing and improved infrastructure investment and planning initiatives, he adds. For instance, Kovacs points out that government real investment in infrastructure is currently at almost half of that in the 1940s. The aging infrastructure, combined with inadequate building codes and area development zoning, are major culprits behind the creeping cost of natural disasters in Canada, Kovacs states. “By spending a little in mitigation, we can save billions in recovery costs, this is the message we’re trying to drive home to the governments.”

The ICLR’s plan

The ICLR has adopted a two-prong approach in its bid to secure government funding for catastrophic loss mitigation. The biggest source of such income lies in convincing the federal and provincial governments to allocate a percentage of infrastructure investment toward mitigation (as mentioned above, the ICLR is hoping to gain $750 million over the next five years).

In a report released by the ICLR last year, the institute notes that governments are currently spending each about $500 million on weather related damage recovery. The report adds, “As Canadians work together to help victims recover from a major disaster, it is time to invest in mechanisms to reduce the chance of a similar loss happening again. Canada’s Disaster Financial Assistance Arrangement [driven through the Joint Emergency Preparedness Program (JEPP) between the provincial governments and Emergency Preparedness Canada (EPC) which coordinates federal funding for disaster recovery] should be expanded to be like the program in the U.S. so that every dollar governments spend on disaster recovery attracts a further 15c that is invested in preventing a reoccurrence of this specific peril.”

The latter issue is the second area of funding the ICLR is pushing for, that being a built-in mitigation budget in the funding provided by EPC to the provincial governments for specific disaster events. Kovacs points out that the agreement between the federal and provincial governments under the JEPP program is currently up for renewal, “and we want an agreement to include mitigation [expenditure] into it [the federal/provincial contract]”.

As Alan Pang, managing director of the ICLR observes, “what’s the point in spending the money on rebuilding a road destroyed from storm damage if the real problem lies with the underground sewerage and drainage system. Before long, we’ll be back having to rebuild the same road at an even higher cost.”

Commenting on the overall feedback the ICLR has gathered from government and private sector sources, Kovacs adds, “we’ve got a national discussion going which has never been there before. This will flow out for a long time.”

Government investigations

In fact, the ICLR’s timing in pushing for financing for disaster mitigation could not have come at a better time. The International Red River Basin Task Force, which was formed in 1997 to provide recommendations on preventing flooding within the basin over both the U.S. and Canadian borders, released its report last month. The outcome of which could see the governments of both countries investing heavily in flood mitigation (see below for further details of the task force report).

The investigative sub-committee from the National Finance Committee, which was formed last year under the leadership of Senator Terry Stratton of Manitoba to investigate effective means of investing in disaster mitigation, is also expected to release its findings to parliament before Ottawa closes down for its summer break. Having aided the senator and his team greatly in their across-country investigation, the ICLR expects several positive recommendations to come about from the sub-committee’s report — particularly in favor of a government financed loss mitigation fun
d. On a less positive note, at least for insurers, Stratton indicated last year to CU that the sub-committee was in favor of supporting a joint government/insurance industry style of insurance in Canada similar to the system under FEMA in the U.S. (even though flooding accounts for the largest annual natural disaster loss, it is currently not insured in Canada).

The Ministry of Defense, which is responsible for the administration of EPC, is also believed to be working on a report recommending government funding for loss mitigation under the JEPP program.

Stratton confirms that his team’s report will be available by the end of June and, he adds, “I don’t believe there are any surprises, it mostly follows the approach taken by the ICLR”.

In turn, Stratton will be holdings meetings with the parliamentary committee appointed to review the sub-committee’s findings. Stratton will also meet with the EPC in the same regard. “Our message will be to tell them to travel, we didn’t have the budget, but we need to see and hear from the people affected [by natural disasters], we have to bring a human face to this challenge. We will also suggest to them [the EPC] that they go back to ground-zero [in field research] in conducting their own investigations.”

Stratton says the concept of a shared government/insurance industry flood insurance program is now unlikely to be on the cards. The committee’s investigations show there is not that much support across the provincial governments for such a program. “Nobody seems to be pushing it [flood insurance]. Unlike the U.S., there isn’t enough people affected in Canada to try applying such a program.”

Stratton says it is still too early to comment on whether the final report of the sub-committee will support the introduction of a loss mitigation fund. “Personally, this is something I believe in, but not everyone [in Ottawa] wants a formal budget.” However, he adds that he and his committee members will be “a little firm” in pressing the federal government to move ahead with whatever disaster mitigation initiatives they finally settle on. “Time is of the essence, and enough answers [in terms of research] is now available.” Stratton is also highly in favor of the International Red River Basin Task Force investigation, “this initiative is absolutely necessary and the way we need to go”.

Red River report

Following extensive investigation, the International Red River Basin Task Force has presented its final report to the International Joint Commission. The result of which could see a massive watershed project being launched in coming years.

However, in compiling its findings, the task force lambasted Canadian government agencies for lack of cooperation in providing research material. “The task force found difficulty in securing public access from Canadian agencies for data…The task force recommended making Canadian data available at no cost and with no restrictions for flood management…” The task force also cautions that, while Winnipeg escaped most damage from the basin flood in 1997, “under flow conditions similar to those experienced in 1997, the risk of a failure of Winnipeg’s flood protection infrastructure is high”.

Other recommendations put forward by the task force include the creation by both the U.S. and Canadian governments of a “national flood mitigation strategy” supported by “comprehensive mitigation programs”. The report also suggests that the governments in question should financially support an acquisitional program of properties in high-risk areas within the basin. Furthermore, the task force was concerned with the high levels of toxic materials either stored or transported through the basin to Lake Winnipeg. “Governments should take immediate steps to ensure that all banned materials such as toxaphene are removed from storage areas in the Red River basin and that potentially hazardous materials are not stored in the 500-year floodplain.”

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