‘No single correct answer’ on how to provide overland flood coverage but government must be involved: IBC

NICC MONTREAL – In order to make overland flood insurance work in Canada, government must be involved – in some way – in pre-planning, but Canada cannot necessarily copy from any other nation’s flood program, Insurance Bureau of Canada’s chief executive officer suggested last week.

“Some insurers began offering their own flood insurance products this year and I think this speaks to your industry’s leadership and its capacity to innovate and venture into this new area,” IBC president CEO Don Forgeron said Friday during the National Insurance Conference of Canada.

He was alluding to announcements earlier this year by The Co-operators Group Ltd. and Aviva Canada, which are offering overland flood coverage on some homes with sewer backup coverage in place.

“There is a growing appetite to take on this risk,” Forgeron said of overland flood Friday at NICC. “However these new products in the market will likely not deal with all of the high-risk properties and for that we believe we need government involvement.”

But government involvement, Forgeron warned, “should be focussed on pre-planning instead of after the fact financial support.”

NICC, held Wednesday through Friday at the Sheraton Centre in downtown Montreal, is an annual event produced by MSA Research Inc.

Forgeron made his remarks while moderating a panel discussion at NICC, titled Flood Insurance Programs – Trials, Tribulations and Success Stories.

The speakers at that panel were Bernhard Gause, a member of the executive board of the German Insurance Association, and Brendan McCafferty chief executive officer of Flood Re.

Flood Re is special purpose vehicle and a not-for-profit monoline reinsurer which was established to “to promote the availability and affordability of flood insurance” for British households, McCafferty told NICC attendees.

Flood Re, which is scheduled to launch in April, 2016, will |”operationalize a cross subsidy from 98% of the population to 2% or so of the population,” McCafferty explained.

Flood Re “relies on a levy of 180 million pounds per year every year” that the British government imposed through legislation on the industry, McCafferty suggested.

“It relies on the insurer being able to identify those risks which it should cede to Flood Re to get the best benefit from their share of the levy they receive, and they receive a levy on the basis of their prior year’s gross written premium in the household sector,” he said.

By contrast, the NatCat insurance system in Germany “is totally private,” Gause said. “The government is not involved in any kind of risk transfer mechanism.”

Before East and West Germany unified in 1990, the supervisory authority in West Germany did not let insurers cover flood, “because of the fear of negative selection,” Gause suggested.

“There was no guarantee for people that anybody would help in case of a flood,” he said of West Germany prior to unification. “People helped themselves with protective measures and you can still see that today.”

By contrast, Communist East Germany had a state-run insurer “with fixed premiums and everybody was insured against everything,” Gause added. “That’s why people (in East Germany) did not take any protective measures, because they knew when something happened they will be compensated.”

The market penetration of NatCat insurance is 40% in Germany, Gause noted, adding 99% of Germans spend more on their car insurance than on NatCat insurance for their homes.

“We don’t know which country has the best solution,” Forgeron said of the German and British systems. “What I can say is the U.K. developed the right solution for the U.K. and Germany developed the right solution for Germany.”

IBC has conducted a detailed analysis of the programs in the other G7 countries, Forgeron said.

“Suffice to say there is no single correct answer, and certainly no flood insurance model elsewhere in the world that can serve as an off-the shelf solution for us here in Canada,” Forgeron said. “The approach we must take and are taking is to study what is in place elsewhere (and) identify best practices that could be applied.”

The “big variable” for IBC, he added, is the role government could play.

“Do they run the program, as they do in some jurisdictions? Or do they simply enable it by fostering the conditions necessary to make sure flood insurance is available? Or is it somewhere in between those two different extremes?”