Why high premiums alone won’t fix Canada’s growing NatCat risk

Canada’s lack of public-private partnership mechanisms to share natural catastrophe risk means Canadian consumers — unlike those in the remainder of the developed world — are “left paying full freight for all peak-peril exposure,” an industry report says.

“The result? Our protection gap is bigger…and almost certainly growing,” writes Alister Campbell, president and CEO of the Property and Casualty Insurance Compensation Corporation (PACICC), in a Solvency Matters report released earlier this month.

While the Canadian property and casualty insurance industry is “already vigorously using the price lever to manage down exposure” in property insurance, that risk mitigation tool alone isn’t proving adequate, Campbell says.

“So, already-high property insurance prices continue to climb and continue to do so at a faster rate than in the rest of the OECD,” he says, referring to the Organisation for Economic Co-operation and Development, an intergovernmental organization that helps countries develop economic and social policies.

Campbell, who is also a senior fellow at the C.D. Howe Institute, referenced an update to a P&C premium benchmarking study he did for the institute which compared Canada to other OECD jurisdictions.

Looking at data from 2020 to 2022, the ‘sobering’ results show “Canadians pay disproportionately high shares of GDP to insure both property and auto,” notes Campbell. “But our industry ROEs remain only average at best.”

In the case of flood, Canada remains the only G7 country without a government backstop to handle properties at high risk of flooding. Canada’s federal government has already reneged on its commitment to fund a federal flood insurance backstop, which was expected to be in place this year. And with a federal election coming later this year, the fate of a national flood insurance program remains unknown.

Campbell believes a guiding principle of insurance in capitalist economies is that it is fundamentally better to ‘institutionalize’ risk rather than ‘socialize’ it.

“By this, I simply mean that private sector mechanisms designed to enable risk transfer for those with exposure are always preferable to public sector, post-event ‘bail-out’ funding, with losses borne more broadly by taxpayers (including those with little or no direct exposure themselves,” Campbell writes in Solvency Matters.

“If there are indeed such significant ‘gaps’ right now, why isn’t our industry doing a better job of responding? Or are there roadblocks that need to be pushed aside in order to enable our industry to help society better spread risk and allocate costs correctly to those incurring that risk?”

 

Looking at solutions

So, what can be done?

Campbell points to other jurisdictions. For earthquake, public/private mechanisms exist in New Zealand, Japan, France and the state of California in the U.S. For flood, public/private mechanisms exist in Spain, the United States, United Kingdom and Germany.

“There is little doubt that the solutions for Canada will need to be uniquely Canadian, but there is much international best practice to draw upon,” Campbell writes. “We just need governments to share our sense of urgency.”

Within Canada, there are successful mechanisms in other lines of business, Campbell points out. In auto, for example, long-established mechanisms such as the Facility Association or provincial risk-sharing pools “serve as exemplars of how our industry has successfully used our innovation capabilities to enable private sector insurance tools to help to address messy public policy problems around affordability and accessibility,” Campbell writes.

“We can…and must…do the same for the full range of secondary and peak property insurance perils. Now.”

 

Feature image by iStock.com/Bob Hilscher