Advice from the U.S.: Canada needs exit strategy from national flood

Canada needs to proceed with caution if it wants to establish a taxpayer-supported program to write flood insurance for high-risk homes, an American speaker warned the Canadian P&C industry during CatIQ Connect.

“Be very careful with a federal flood insurance program that you have a way out,” said Alice Hill, the David M. Rubenstein senior fellow for energy & the environment at the New York City-based Council on Foreign Relations.

Hill was referring to the United States National Flood Insurance Program during Fireside Chat: Learning From “No More” Moments: Implementing Adaptation Ambition in 2021. The Feb. 11 webinar was produced by Toronto-based Catastrophe Indices and Quantification Inc. (CatIQ)

NFIP owes US$20.5 billion to the U.S. government, and that is on top of US$16-billion debt forgiven in 2017, the Congressional Research Service said in a paper released Jan. 5, 2021. Essentially this means the NFIP’s claims cost have exceeded its premiums collected by more than US$35 billion.

During the CatIQ Connect panel, Hill alluded to political pressure in recent years to subsidize flood insurance in the United States under NFIP for rates that do not reflect true risk.

“Our [national flood insurance] program was built with the best of intentions in the 1960s,” she said. “Insurers did not really want to take on that flood risk, and now 50 years in, it is broken. It is really difficult to get actuarially sound rates. Properties have been built over and over again.” Hill was speaking in the context of the increasing cost to insurers of weather-related property damage, and how difficult it is for insurers to price the product when homeowners deliberately build in high-risk areas.

Hill, a member of the board of directors of Munich Re North America, is a former senior director for resilience policy on the U.S. National Security Council staff. She also previously served as a judge in Los Angeles.

When NFIP was established in 1968, the idea was to work with communities to make insurance available and affordable in the short term, Roy Wright, CEO of the Insurance Institute for Business and Home Safety, said during the 2020 CatIQ Connect at the Metro Toronto Convention Centre.

“If you read the early documents, they asserted that within 10 years of telling people that they lived in harm’s way, [the people] would move, so that [NFIP] would not continue on forever,” Wright said in 2020, urging Canada not to adopt a similar model.

Canadian Underwriter recently asked the Insurance Bureau of Canada whether there is any clear indication that the Canadian government might provide money to an insurance pool for homes at high risk of flood.

“That is something to be decided. All options are on the table,” replied IBC federal affairs vice president Craig Stewart in an interview Feb. 2 about the Task Force on Flood Insurance and Relocation, which had its first meeting the last week of January 2021.

IBC has looked at flood insurance programs in seven jurisdictions, IBC CEO Don Forgeron said Feb. 11 while moderating the 2021 CatIQ Connect fireside chat.

“With the exception of the British model, which is a more recent development, they all taught us what not to do in terms of developing national flood programs. That being said, here in Canada, we commit some of the same mistakes of rebuilding in the same neighbourhoods. ‘Water ways’ are called ‘water ways’ for a reason. They get flooded out and there is political pressure to rebuild, and it happens yet again.”

The British program Forgeron alluded to was Flood Re, a reinsurer established in 2016 that is subsidized by a tax imposed on all insurers writing home coverage in Britain.

Neither IBC nor the federal government is talking about setting up in Canada a system that looks exactly like Flood Re.

Canadian insurers started offering overland flood coverage on personal property in 2015, but IBC is concerned that coverage in Canada is not available at affordable rates to many homes.

In a mandate letter from Prime Minister Justin Trudeau, federal public safety minister Bill Blair was asked in November 2019 to work with Ahmed Hussen (minister of families, children and social development), to create a low-cost national flood insurance program to protect homeowners at high risk of flooding and without adequate insurance protection.

Canadian Underwriter asked Public Safety Canada in 2020 whether the industry can expect at some point to have a low-cost national flood insurance program in place for high-risk residential properties.

The federal government has yet to make a decision, but a Public Safety Canada spokesperson did tell Canadian Underwriter in 2020 that the government will give “full consideration” to the three proposals IBC made in its 2019 paper.

One option is a public-private high-risk pool, which could get capital from ceded premiums, contributions by government, levies applied to homeowners, and levies applied to property taxes.

Another possible option proposed by IBC is a pure market approach, meaning homeowners would decide whether to self-insure, relocate, or try to get insurance from the private market.

The third option would have the private sector take on as much contingent liability for flood as its risk appetite allows, while leaving the highest-risk properties (where private-sector insurance would not be affordable at actuarially-sound rates) to be covered by government disaster assistance programs.