Flood Insurance in Canada

March 2016    |    By Indrani Nadarajah

ABSTRACT: As a result of the warming climate, floods are becoming more prevalent worldwide. Flooding is the most frequently occurring natural hazard in Canada. Many industrialized nations have residential flood insurance programs operated either by government agencies, insurers, or both, but up to very recently, Canada was the only G8 country which did not have overland flood insurance for homeowners. This was due to several reasons – chief of which was the lack of proper flood maps that insurers could use. The situation is now changing with industry-led initiatives to create comprehensive flood maps. Some insurers are also beginning to offer the overland water protection to customers.

Flood damage and its economic costs for Canadian taxpayers emerged as a political hot potato after the Southern Alberta floods in 2013. That flood is estimated to cost insurers more than $2.25 billion even though the damage to residential homes was not covered in most cases. In 2011, floods in Manitoba and Quebec generated $1.1 billion and $78 million in costs, respectively. The Toronto flood in 2013 was the most expensive natural disaster in its province, costing taxpayers an estimated $805 million.

The pressure on the public purse is also escalating. On February 25, 2016 the Parliamentary Budget Officer released a report (pdf), which stated that storms, hurricanes and floods will cost the federal disaster fund $902 million a year over the next five years, well above past payouts.

Jean-Denis Frechette’s office calculated that the federal Disaster Financial Assistance Arrangements (DFAA) can expect to spend $229 million a year to deal with damage from storms, with floods adding another $673 million a year.

The report also notes that climate change is likely a factor in the intensity of Prairie flooding. “The warming in the Arctic has been associated with persistent weather systems in the mid-latitudes as well as extreme weather events,” the report stated.

Water-related Coverage

Currently, home insurance policies in Canada typically offer some form of protection against water damage:

- Water main breaks or overflowing or leaking installations like hot water tanks or washing machines. Such damage is covered by the homeowners’ policy.
- Water entering the home through sewer system backup (an optional endorsement).
- Seepage of surface water, caused by heavy rainfall or snowmelt overwhelming drainage systems (overland water) is now beginning to be covered by some companies.
- Flooding when a river, lake, stream, or other body of water overflows is not covered by any home insurance product in Canada.

Overland Water Protection

Until 2015, Canadians that suffered flood damage had to rely on the Disaster Financial Assistance programs provided by the federal, provincial and territorial governments. Those recipients have discovered that, even with financial assistance from the government, they were out of pocket by tens of thousands of dollars.

Last year, Aviva was the first insurer in Canada to announce overland water protection for customers. Overland Water is defined as fresh water from rivers, lakes or water accumulated as a result of heavy rainfall. Flood refers to coastal flooding from salt water – such as from tsunamis and tidal waves. Flood is not covered by this product, Barry Owen, Aviva’s product development expert on Overland Water emphasized.

“The response from customers has been extremely positive,” Owen said. “Our brokers like the fact that the product is simple in terms of the coverage and eligibility, and that it’s available to and affordable for the vast majority of their Aviva customers across the country.”

The product, launched in June 2015, is currently available in all provinces across the country, with the exception of Quebec. Aviva has confirmed it is planning to make the coverage available in Quebec in early spring 2016.

The Cooperators began to offer overland flood cover (launched in Alberta last May), and so has RSA Canada.

These are good and important beginnings but a lot more needs to be done, says Glenn McGillivray, managing director of the Institute of Catastrophic Loss Reduction. “The most pressing issue is availability, but it’s only a matter of time before it becomes more available. Once things get moving, we will probably see bigger companies get involved, especially if they want to be more competitive.”

History of Flood Mapping

A big problem for the insurance industry is the lack of accurate flood data. Currently, mapping is available along some 28,000 kilometres of rivers and streams in Canada, with about 50% of the mapping prepared before 1996, under the then auspices of the now-defunct Flood Damage Reduction Program.

The Flood Damage Reduction Program, an initiative of Environment Canada, was implemented in collaboration with provincial and territorial governments in the 1970s and ran until 1996. It was critical in getting the provinces and the federal government speaking the same language regarding flood mapping and defence, risk reduction, and disaster assistance.

Unfortunately, the Federal government withdrew from its leadership role in flood mapping when the FDRP was allowed to wind down about 20 years ago.

Problems with Existing Maps

According to a 2010 joint ICLR- Swiss Re discussion paper, Making Flood Insurable for Canadians, insurers require the following types of information before they can offer affordable flood coverage:

1. a delineation of flood prone areas
2. the frequency of floods
3. the possible flood-related damage that could result

Canada does not yet have a national standard for flood mapping. Furthermore, areas that are prone to urban flooding are not generally defined, mainly because urban flooding is usually transient. Areas that are known to be flood prone also generally do not have the risk quantified.

What flood maps that are available are actually “hazard maps”, say experts. Hazard maps are helpful in guiding effective land-use planning, but do not provide the level of information required for “risk maps”. For example, hazard maps do not provide information on the risk of actual flood related damage - such as, where and how often flooding is likely to occur, and the financial cost of flood damages.

Flood maps in this country also apply different return periods depending on the province, location or authority. For example, Alberta applies a 1 in 100 year return period, British Columbia applies a 1 in 250 year period, and Ontario applies multiple return periods in different parts of the province.

To facilitate a more informed discussion about flood mapping, the Insurance Bureau of Canada launched its flood mapping initiative late last year whereby new pluvial and fluvial flood maps for Canada would be created. The new models, produced by LexisNexis’ partner, JBA Risk Management,” fully leverage local river, rainfall, snowmelt and higher resolution Digital Terrain Model (DTM) datasets, resulting in completely updated river flow and rainfall estimates based upon a much more detailed hydrological study where snowmelt is now explicitly modelled.”

The IBC wants to “support its conversation with the Federal government, to develop a national flood insurance program. We are very interested in talking to them about the grouping of properties that are at very high risk and difficult to insure. Before we started creating the maps there wasn’t any nationally consistent flood map initiative,” IBC senior policy advisor Chris Rol said.

Preliminary data so far reveal that about 1.8 million households would be considered at “high risk” of flooding. Rol said the broad numbers came quite close to what the Bureau had expected.

Flood Insurance Criteria

According to a report commissioned by The Co-operators and undertaken by University of Waterloo academics Jason Thistlewaite and Blair Feltmate, the viability of flood insurance is determined by four standards:

1. The first standard is that an insurer must be able to accurately price the probability of a flood event occurring, and the losses generated by the event.
2. The second standard is that premiums can be priced at an affordable level but compensates the insurer for its costs.
3. The third standard requires that premiums are priced at a level that ensures a modest profit to compensate insurers for the additional assumed risk.
4. The fourth standard is that premiums should encourage the adoption of risk-mitigation measures by policyholders. Insurers have expressed concern about “moral hazard”- when policyholders forgo investments in mitigation if they are covered for damage.

The profitability requirement does not always coincide with affordability for the most vulnerable consumers, especially as flooding tends to consistently impact the same areas. This concentration of risk leads to “adverse selection” where only the most at-risk populations will choose to buy coverage. As a consequence, flooding does not impact a broad enough risk community to generate a sufficient premium base to cover large loss events.

Some commentators have suggested that adverse selection can be overcome if flood insurance is bundled into homeowner insurance policies that cover other perils like fire and theft, but this might still require that “very high risk” households be excluded from the program, if premiums are to remain affordable.

This is where government policy, not insurance, may be the best option to address the risk of flood damage for high-risk homes.

Lack of Coordination at the Top

Apart from the paucity of flood data, which is now being rectified, the ICLR’s McGillivray points to the smorgasbord of ministries, agencies, departments, authorities, and councils that are responsible for managing flood in many provinces.

The lack of coordination between those responsible for riverine flooding, municipal storm water management, and groundwater monitoring in many Canadian jurisdictions complicates the issue. “There is no single person and no single agency or department that is in charge of flood,” he states.

Pointing to Ontario as an example - McGillivray says that, depending on location and type of event being considered (eg. fluvial or riverine vs. pluvial or urban), flood in Ontario is managed by at least 36 different authorities, with Conservation Ontario as the umbrella organization. Above this, one can add the provincial Ministry of Natural Resources, and a total of 444 municipalities of the upper, lower and two-tier variety. Unfortunately, this confusion is replicated across the rest of Canada.

The winding down of the FDRP almost completely put an end to provincial/federal discussions and coordination related to flood management, says mcGillivray. Today, much of the communication that takes place revolves around the application for, and payment of, disaster assistance from Ottawa to the provinces via the Disaster Financial Assistance Arrangements.

The State of Municipal Infrastructure

The current state of infrastructure in Canadian municipalities is also believed to be a significant contributor to the increase in water damage claims.
 
For example, a 2008 ICLR study reports that the August 2005 urban flooding event in the Greater Toronto Area caused extensive overland flooding and sewer backup. Royal and Sun Alliance reported that the average claim was for $30,000, compared to a $15,000 average from the Peterborough flood of the year before. The average sewer backup claim was $19,000, compared to the usual $3,000 to $5,000.

Canada’s first report card on municipal infrastructure (pdf) was released in 2012. The report card ranked the condition, as of 2009-2010, of infrastructure and infrastructure management in Canada through a survey of 123 Canadian municipalities. Overall, the report card rated 30% of municipal infrastructure in Canada as “fair” and “very poor.” The replacement cost of the assets ranked as fair and very poor was estimated to total $171.8 billion, nationally. Water systems in some areas of Canada were unable to handle the increasing levels of precipitation, the report noted.

The latest Canadian Infrastructure Report Card, released January 2016, is based on detailed surveys of municipalities from across the country, does not paint a radically different picture.

It says about 12% of municipal infrastructure is in poor or very poor condition and those assets would cost $141-billion to replace.
 
The survey, led by the Federation of Canadian Municipalities, showed that roads and sidewalks, drinking-water pipes, storm-water maintenance, sports and recreational facilities, and bridges are currently the most underfunded.

The problem of ageing infrastructure is a real one. In Urban Flooding in Canada, a February 2013 study, Dan Sandink of the ICLR writes that “in older subdivisions, infrastructure capacity may be designed to a lower standard (e.g., one-in-two-year precipitation events)”.

Glenn McGillivray said that “There’s a perception that municipalities are not doing anything, but the reality is that they are doing a lot to rectify the situation.” At the moment, municipalities are playing catch-up.

Federal Initiatives

The previous Federal Government established a $33 billion Building Canada Fund, which had a seven year funding plan spanning 2007 to 2014. Significant projects were undertaken to alleviate the flood problem. Two bridges in Manitoba were given the green light for replacement as part of the Red River Floodway Expansion project, which has achieved 1-in-500 year flood protection, from its initial 1-in-100 year level. “Once finished, the project will protect more than 450,000 Manitobans, over 140,000 homes, over 8,000 businesses and prevent more than $12 billion in damages during a major flood,” Infrastructure Canada said in a statement.

In 2014, the National Disaster Mitigation Program was introduced in the Federal Budget. The $200 million program spans five years. The main objectives of the NDMP are flood-related. The program is directing investments towards reducing significant, recurring flood risk and costs; and advancing work to facilitate private residential insurance for overland flooding.

Educating Consumers a Priority

The 2013 Co-operators commissioned study reported that 70% of Canadian homeowners believed their insurance policy fully covered them for flooding. Not surprisingly, the industry is taking its role of educating consumers very seriously.

Aviva reports that while many of their homeowners are more aware of the risks of overland water as a result of media attention, some do assume they are still covered under their homeowner policy – this was based on customer and broker research that was conducted by the company. That is why a key element of Aviva’s marketing and communications for Overland Water has a strong emphasis on customer education.

“Consumer education is a shared responsibility. More collaboration is required from the industry and all levels of government,” Aviva’s Owen said.

Sometimes, policyholders are confused between overland water and sewer backup. Carolyn Andreacchi, director of personal insurance underwriting at RSA Canada, was quoted in an article where she said “Although there has been an increase in the level of consumer awareness of the risk that climate poses to our personal and financial well-being, we recognize as industry professionals the difficulty consumers face in distinguishing flood exposure potential from sewerage backup.” RSA’s Climate Smart website targets brokers and consumers, and offers tips on reducing property damage.

The latest survey (involving 1,500 people), conducted by Vancouver-based broker Square One, has shown that 65% of Canadians still mistakenly believe that flood protection is included in home insurance policies. The belief is most commonly held in Manitoba and Quebec, where 69% of those interviewed incorrectly assumed that they were covered for flood protection. The most aware province was Saskatchewan, where 52% mistakenly believed they were covered.

Square One has launched www.getfloodinsurance.ca, a website designed to help explain residential flood insurance and educate on the difference between overland flood, sewer backup, and water damage.