Actuarial Notes

Adapting to Rising Flood Risk: An Analysis of Insurance Solutions for Canada

By Task Force on Flood Insurance and Relocation · Public Safety Canada · 2022

Study guide: Exam 6C

The August 2022 report of Canada's Task Force on Flood Insurance and Relocation on insurance solutions for homes in high flood risk areas. One federal commitment to address rising flood risk is to bring affordable flood insurance to currently uninsured homes in high-risk areas; the report presents evidence-based analysis by academics, actuaries, researchers and Task Force members to give a common understanding of the possible insurance solutions. By design it costs four insurance models without recommending one over another, and treats relocation policy and program design as beyond its scope.

On the syllabus

  • Exam 6C — objectives B1–B3; Sections 1–3 and 5–8.

Glossary of General Terms

Glossary of Insurance Terms

Acronyms

Executive Summary

  • A Task Force to Explore Insurance Solutions
  • A Shared Evidence-Basis for Decision-Making
  • Key Findings of the Task Force
  • Living with Water

1 Introduction

  • 1.1 Overview of Flood Risk in Canada
  • 1.2 Key Drivers of Canada's Flood Risk
  • 1.3 Defining the Problem
    • The market provides flood coverage only in low and medium risk areas, while high-risk areas hold about 90% of residential flood risk — leaving the cost on homeowners and, for catastrophic events, on government disaster financial assistance.
    • The obstacles are the high cost of insurance, low risk awareness (94% of Canadians in high-risk areas are unaware of it), and misaligned incentives: taxpayer-funded disaster assistance contributes to a moral hazard on multiple levels.
  • 1.4 The Task Force on Flood Insurance and Relocation
    • Stood up in November 2020 to explore low-cost flood insurance for residents of high-risk areas and strategic relocation where flooding recurs; in scope are privately owned residential properties and fluvial, pluvial and coastal flooding.
  • Flooding causes about $1.5 billion in damage a year (about $700 million insured and $800 million uninsured), with residential owners bearing about 75% of the uninsured losses.

2 Flood Risk Management in Canada

  • 2.1 Roles and Responsibilities for Flood Risk Management
    • Responsibility is shared: the federal role stems principally from the Emergency Management Act, provinces and territories govern land use and regulate the insurance sector, municipalities weigh flood risk against property tax revenue, and the insurance industry transfers flood risk from homeowners through endorsements.
    • The Disaster Financial Assistance Arrangements, established in 1970, reimburse provinces and territories for response and recovery costs of large-scale disasters.
  • 2.2 Impact of Risk Reduction
    • For smaller-scale events the most impactful household measures can often cost under $250, and strategic relocation eliminates exposure entirely, though buyouts are difficult, time-consuming and expensive.

3 Flood Hazard and Damages in Canada

  • 3.1 Methodology for Estimating Flood Damages
    • Flood hazard, exposure and consequence are combined, using broad-coverage flood models from vendors to the insurance market (Catastrophe Modelling); all estimates are in 2020 dollars.
  • 3.2 Results of Flood Damage in Canada
    • The average annual loss (AAL) from residential flooding is estimated at $2.97 billion; the riskiest 10% of residences contribute $2.65 billion (89.3%), the top 1% about 34.1%, and the median AAL is roughly $10.
    • The estimate exceeds earlier ones of $1.0–1.5 billion because of a fuller count of residences, tail-risk events beyond the 1-in-1000-year return period, and damage never recorded as insured loss.

4 Equity and Social Vulnerability Analysis

  • 4.1 Social Vulnerability Analysis
  • 4.2 Socioeconomic Indicators in High Flood Risk Areas
  • 4.3 Focused Engagement on Indigenous Experiences with Flooding
  • 4.4 Canada's North

5 Building Policy Options for Canada

  • 5.1 International Examples of Flood Insurance Solutions
    • Australia (a fully private market), France (the CatNat scheme's uniform 12% surcharge, reinsured by the state-backed CCR), the United Kingdom (Flood Re) and the United States (the NFIP) are compared on administration, choice, packaging and pricing.
  • 5.2 Guiding Insights for Canada
    • Twelve insights under four themes: uncertainty; market penetration, adverse selection and mutuality; affordability; and moral hazard.
  • 5.3 Policy Objectives for Flood Insurance
    • Six Public Policy Objectives: adequate and predictable compensation; risk-informed price signals; affordability; wide availability; maximum participation; and value for money for governments and taxpayers.
    • The objectives trade off against one another, and the $2.9 billion of flood risk "does not go away with different arrangements, costs are simply shared differently".
  • 5.4 Insurance Models for Canada
    • Four models are costed — Flat Cap High-Risk Pool, Tiered High-Risk Pool, Public Insurance and Public Reinsurance (Layered) — each with a conceptual lifespan of about 25 years.

6 Results of Model Analysis

  • 6.1 Assumptions
  • 6.2 Insurance Model Design Features
    • High-risk homeowners are those whose flood premium would exceed 0.1% of the coverage amount ($300 for a $300,000 policy), about 10% of households.
  • 6.3 Insurance Models for Actuarial Costing
  • 6.4 Actuarial Results of Four Models
    • The two high-risk pools need less funding but leave significant residual risk; the Public Insurer costs governments the most in absolute terms; the layered Public Reinsurer gives strong risk reduction incentives with reduced funding.
  • 6.5 The Effect of Risk Reduction
    • Losses could grow 5–6% a year; de-risking or relocating about 77,000 homes (the riskiest 0.5%) would cut the annual cost of caps and subsidies to governments by more than 50%.

7 Discussion

  • 7.1 Adequacy and Predictability of Compensation
  • 7.2 Risk Reduction
  • 7.3 Affordability
  • 7.4 Availability
  • 7.5 Participation
  • 7.6 Value for Money
  • 7.7 Summary of Discussion Results
    • Rated against the six objectives, all four models are strong on availability; the Public Insurer and Public Reinsurer are strong on adequacy, participation and value for money, where the Flat Cap pool is weak on participation and value for money.

8 Key Findings

  • 8.1 Current Flood Risk
    • Total residential flood risk is estimated at $2.9 billion per year, and the vast majority is concentrated in a small number of the highest risk homes.
  • 8.2 Insurance Considerations
    • Some standardization is needed in the market; participation is key; and greater public intervention can more fully close protection gaps, but at a cost.
  • 8.3 Relocation Considerations
    • Relocation can be a powerful risk reduction tool, but must be informed at the community level.
  • 8.4 Equity Considerations
    • Affordability of premiums is key to equitable access, pathways to insurance are about more than money, and the cultural connections of Indigenous peoples to water and land must be respected.

9 Conclusion and Way Forward

  • 9.1 Preconditions for success
  • 9.2 Additional Work
  • 9.3 Way Forward

10 Annexes

  • 10.1 Annex A – Task force diagram & list of member organisations
  • 10.2 Annex B – Best Practices for Strategic Relocation
  • 10.3 Annex C – Flood Mapping methodology
  • 10.4 Annex D – Parametric Models
  • 10.5 Annex E – Detailed Overview of Parameters of Costed High-Risk Insurance Models

Sources