On the Rise

Often sheltered from the spotlight on global natural catastrophes, Canada is no longer eluding the risk of significant damage and financial impact from severe weather events. It is widely known and accepted that Canada’s geography is exposed to various high-hazard earthquake and flood zones, but are Canadian businesses and insurers actually prepared to deal with these quickly increasing risks?

History has proven not yet.

Starting June 19, 2013, 200 litres of rain per square metre fell in one day, causing the Bow River in Calgary to swell to a level three times higher than during the 2005 flood in the same region, notes a recent report from global reinsurer Munich Re. The 2005 event resulted in insured losses amounting to $275 million, adds Aon Benfield’s weekly cat report for June 28. That compares to one preliminary estimate that insured losses from the recent floods in Alberta will likely exceed $1 billion.

To date, there is no recognized stochastic model available for flood in Canada to look into the recovery process now that this flooding has subsided. Beyond that, it appears that despite a need, no one is building such a model.

The key challenge in doing so is getting flood plain data from provincial governments. Add to this challenge that where the aforementioned data is available, provinces are often not willing to share it, never mind questions about the quality.

Models are needed if the insurance industry and businesses can hope to adequately estimate and prepare for catastrophic risks in Canada. It is also important to note policy changes on the part of the Province of Alberta to address these clearly crucial risks to private citizens, businesses and public infrastructure, as well as the resulting impacts on economic performance.

PREVENTIVE MEASURES

Alberta has recently announced significant legislative changes expected for the fall of 2013 that will restrict the approval of future development within floodways, recognizing the imperative action of mitigating flood damage and expediting recovery efforts. In addition, new government policies will also provide funding through the Disaster Recovery Program (DRP) for homeowners to rebuild or relocate outside flood-exposed areas, support certain risk mitigation infrastructure to protect property that remains exposed and confirm that those who do not mitigate the risk of flood to their property against a 100-year flood event will not be eligible for DRP funding if future flooding results in losses.

This approach – one that may now seem necessary in light of the region’s now obvious catastrophic risk exposures to flood – represents a step in the right direction, but comes too late to prevent the already devastating effects of these events.

While this is important progress in mandating flood protection, Alberta is now only catching up with Manitoba, Ontario and Quebec, all of which already restrict the development of flood-exposed geographies. Alberta’s changes will further align the province with existing federal flood assistance programs.

CITY SCAPE

There are also unique risks and disaster recovery challenges that need to be contemplated for municipalities and businesses in major urban centres. The challenges have become clear over the past year, particularly in the wake of the impact of post-tropical storm Sandy and, more recently, the flooding on July 8, 2013 in Ontario.

Over a two-hour period, 95 millimetres of rain fell in and around the City of Toronto, causing extensive flooding in the downtown core and surrounding areas. Some reports have indicated that the insured losses are expected to exceed $700 million, but could be as high as $1 billion, suggests one analyst for Aon Benfield.

It became evident that the scale and complexity of infrastructure, including transit, coupled with population size, presents specific challenges to disaster efforts and the time needed to recover. In Toronto’s case, this included extended rolling black-outs and shutting down much of the city’s transit system.

INCREASING LIKELIHOOD

The unprecedented flooding – along with recent changes to the Office of the Superintendent of Financial Institutions’ (OSFI) earthquake guidelines and a

robust forecasted hurricane season in the United States – are keeping insurers and businesses on high alert. Although the Canadian insurance market recovered well from record losses in 2011, 2012 marked the third straight year of losses in excess of $1 billion, and 2013 is on track to exceed this benchmark by a significant margin.

Globally, catastrophic losses have been on the rise and the cost of insured losses from weather-related events has trended upward over the past 30 years, notes 2011 Natural Catastrophe Year in Review, released by Munich Re in January 2012. The concern remains that such events and costs will not be rare in the future and, in fact, are likely to increase.

While the insurance industry in Canada remains financially strong, insurers and OSFI’s actions are intended to proactively protect the interests of policyholders and ensure that the industry is prepared for the significant financial impact of future major catastrophic events. Businesses need to recognize that the issue is much larger than one disastrous event.

The risks in Canada are changing. It is imperative for companies to recognize this changing landscape and become proactive towards risk management, leveraging access to industry expertise, technical risk analysis and leading risk control measures.

To accomplish this, companies should look to the lessons learned in the U.S. and elsewhere. The North American hurricane season has begun and businesses with assets or operations, particularly in Atlantic Canada, should pay attention. Forecasters at the U.S. National Ocean Atmospheric Administration are looking at almost 20 named storms for this season, with a 70% probability.

This type of anomaly puts Atlantic Canada in a strong risk profile, but insurers do not have a decent handle on exposures for New York and north into Canada. Current models do not account for inland flooding and surface water run-off, except in the flood loss leakage into the wind model.

Companies also need to focus on exposures in Canada’s high-hazard earthquake zones, specifically along the St. Lawrence Seaway and in the Vancouver area of the Pacific Northwest, where the accumulation of property values is of particular concern to insurers and regulators. Insurers are now taking direct action as a result of OSFI’s recently released Earthquake Exposure Sound Practices, revised guidelines that seek to emphasize and strengthen the approach for insurers to manage earthquake exposures in Canada, as well as to update industry practices based on knowledge and improvements to technology, and increased exposure information in recent years. These measures will help insurers in Canada be prepared financially to deal with the ramifications of a major earthquake event.

In response, insurers have actively looked to reduce policy count and capacity in the Vancouver area, which is directly impacting policyholders, availability of coverage and rate.

Preparation is crucial to avoiding common challenges after a natural catastrophe strikes. Having the right plan in place will result in robust risk management strategies, ease immediate disaster response planning, crisis management and business continuity. It is business interruption and contingent business interruption that have the most significant impact on the long-term success and viability of a business.

Brokers today have invested more in people, technology and forecasting than ever before. Senior leadership should be utilizing these resources to be fully prepared for natural catastrophe events, protecting their people, product, property and supply chain – the core of a company’s success and essence.