Canadian Underwriter

There goes the neighbourhood

January 4, 2020   by Sarah Cunningham-Scharf, Freelance Writer

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Moving is among one of the more stressful things you can do in your life, health research indicates. And the stress is compounded when Mother Nature kicks you out of your own home.

Certainly, everyone can appreciate why people want to stay in their homes, no matter what the potential risk of damage. But now that water damage has crested to the top of insurers’ claims expenses, insurers are less inclined to support a homeowner’s desire to live in a high-risk flood zone. Recent industry discussion has focused on moving people out of harm’s way. But how do you entice people to move out of high-risk flood plain areas?

Flood of water claims
Water damage made up about one-quarter of all catastrophic damage in Canada this past year, according to Catastrophe Indices and Quantification Inc. (CatIQ). Looking at the global water damage totals between 1983 and 2008, the average annual cost of water-related damage was between $250 and $450 million, says Blair Feltmate, head of the Intact Centre on Climate Adaptation at the University of Waterloo. But for nine of the past 10 years, that average has ballooned to $1.8 billion.

The average cost for an insurer to fix up a homeowner’s water damage claim is $43,000, according to Insurance Bureau of Canada (IBC). Most insurers have stopped insuring high-risk homes for flooding.

Moving people out of flood zones has become a topic of discussion for governments of all levels. But there’s a lot of sensitivity attached to the issue. For example, after a severe weather system caused significant water damage to many Quebec homes on Apr. 8, the provincial government revamped its disaster assistance program. Payouts would be capped at $100,000; once homeowners reached that threshold, the province would offer to buy their home for $200,000. Although Quebec’s $100,000 cap significantly exceeded the $43,000 average cost for a flood claim, the provincial government’s $200,000 buyout option caused a backlash from residents.

“People showed up at town hall meetings,” says Feltmate. “They were jam-packed, sitting five rows deep, with great concern that their houses were registered as being in high flood-risk zones. They saw it as stigmatizing their homes, devaluing property.”

The crux of the problem, says Glenn McGillivray, managing director for the Institute for Catastrophic Loss Reduction, is that while $200,000 is the average value of a home in the province, it doesn’t represent the value of all Quebec homes deemed to be a high flood risk. “It’s pretty widely accepted that the offer made by the province of Quebec is well-meaning, but perhaps not quite on the mark,” he says.

Other Canadian expropriation programs have yielded similar results. For example, many residents of Mississauga, Ont. resisted the Cooksville Creek buyout program in 2017. Two-thirds of Calgarians who were offered buyout packages following severe flooding in 2018 also refused to move.

But that doesn’t mean all home buyouts are destined to generate opposition, Feltmate says. “They do work. We know that they’re possible to execute almost in all cases.” For example, after Hurricane Sandy pummeled New Jersey in 2012, the state’s Blue Acres buyout program saw the successful purchase of homes in high-risk areas. The homes were then converted into vacant land where excess water could drain more effectively.

So why was sentiment positive toward New Jersey’s program and not Quebec’s? For McGillivray, the biggest difference is that the homes south of the border were purchased at fair market value. “Buyouts at fair market value — that’s the key,” he says. Systems are already in in place to determine the fair market value of Canadian homes, he adds. “If you were to sell the home pre-flood, what would you put it on the market for? We deal with municipal tax assessments all the time and real estate agents help us. The machine’s already there.” That begs the question: if it’s possible to offer buyouts at fair market value, what’s preventing Canadian expropriation programs from succeeding?

Flood plain mapping is outdated
“Flood plain maps on average across the country tend to be about 20 to 25 years out of date,” Feltmate says. “The Trudeau government made a commitment to update the flood risk maps for Canada and make them broadly available in a user-friendly format. But they’re not there yet.”

But even though the federal government can take strides to improve the quality and accuracy of flood maps, flood resiliency falls under provincial jurisdiction — and the definition of a high flood risk zone varies from province to province, says Feltmate. “Some use a one in one-in-150-year flood event to delineate flood regions or flood zones. Some use a one-in-500-year.”

Craig Stewart, IBC’s vice-president of federal affairs, says the responsibility for identifying high-risk properties is generally passed down to municipalities. They’re the best-placed to identify those homes, he says. “However, we need a means for them to access industry flood data so that the true risk of those properties can be priced accordingly.”

Recognition of homeowners’ mitigation efforts
Homeowners have taken steps to waterproof their homes, says Feltmate. “Homeowners can engage in a lot of things proactively themselves — things they can do over a weekend, for a couple hundred dollars, with no special expertise.” Examples include disconnecting down spouts from the eavestroughs system if water is running into the weeping tile system; watertight windows at grade level; and battery backup supply for sump pumps so they will run during a power outage.

The problem is, the insurance industry “is not set up to identify, certify, and insure such homes because the modifications are made at the individual property level,” says Stewart. “That’s a big wrinkle. Will those homes be insurable because they’ve been mitigated? As an industry, we don’t have a consistent answer yet.”

At the community level, IBC is “working on how to capture flood mitigation efforts properly, so that if flood diversions, dams, or culverts are installed and communities are de-risked, we can model that more accurately,” Stewart says.

The path forward
IBC and the federal government are coordinating a three-year plan with the following steps:

1 | Modernizing flood mapping through collaboration between different levels of government, institutions, and the insurance industry.
2 | Using updated floodplain mapping, communities can identify homes at risk and encourage homeowners to reduce the odds of water damage.
3 | Insurers can offer incentive programs for homeowners who take mitigation steps.
4 | Communities can more accurately identify residents at highest risk and buy them out at fair market value.
5 | For high-risk homeowners who refuse to move, insurers can create a specialized high-risk insurance pool through a public-private partnership.

The three-year timeline isn’t carved in stone, Stewart cautions. In the meantime, Feltmate says communities and homeowners should be more proactive about reducing their flood risk.

Communities “can use berms, diversion channels, holding ponds, cyst turns, bio swales, and permeable surfacing,” Feltmate says. “They can do strategic restoration or save natural infrastructure. There are a lot of things we can deploy within communities practically and cost-effectively.”

Floodplain maps may be out of date, Stewart says, but “many municipalities have a good idea which properties are probably at highest risk. So they don’t need to wait until governments and insurers collaborate and get a national program going. They can start identifying these properties now.”

Once those homes are identified, McGillivray says fair market value buyouts are the best solution. “The Number 1 rule of risk management is to avoid the risk,” he says. “So, if you’re not [living] there, don’t go there. And if you are there, get away from there.”

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