Plains Worry

Cost estimates for the flooding in Alberta are starting to trickle in – a stark contrast to the deluge unleashed on the southern part of the province from June 19 to 21. An unusual “blocked” jet stream pattern developed across western North America before that stream trapped a strong area of low pressure over southern Alberta and that system pulled a moist channel of air from the Gulf of Mexico northward, colliding with the Rocky Mountains, Tim Doggett, senior principal scientist for catastrophe modelling firm AIR Worldwide, explains in a statement.

“As the air mass was pushed higher and higher, the air cooled and condensed, creating a large amount of precipitation (up to 200 millimetres of rain fell in some areas),” Doggett reports.

“A similar pattern of the jet stream in Europe has been the cause of the large floods in Germany just two weeks before and the results were similar in terms of the impact on densely populated areas,” notes an email response from Munich Re.

“There has been a trend in the last decades to larger movements of the jet stream and a higher duration of such patterns, which means intensification of longitudinal air transport (arctic air to the south; subtropical air to the north) and longer durations of the specific weather (intense precipitation in the troughs represents heat waves/droughts in the ridges),” Munich Re adds.

In Alberta, “this disaster is entirely unique in its speed, its scale and its scope in the number of people and communities that it impacted,” Premier Alison Redford said in a statement. The government has already approved $1 billion in emergency recovery and reconstruction funding.

The Canadian government has paid out more than US$2 billion since 1970 in post-disaster assistance to help the provinces and territories restore infrastructure and personal property to pre-disaster condition, notes Sharon Ludlow, president and CEO of Swiss Re Canada. “But the price tag keeps rising as disasters become more frequent and severe. On average, nine payouts were made annually in the previous decade, but in 2011, there were 26.”

Steve Kee, director of media relations for the Insurance Bureau of Canada (IBC), said in early July that no specific claims numbers were available, although a preliminary estimate was expected in a couple of weeks. “The 2005 flooding (in Calgary) resulted in $300 million in insured damages. This will be worse.”

One preliminary cost estimate put expected insured losses in the range of $1 billion to $3.75 billion, A.M Best notes in its Best’s Briefing for July 1.

If so, those numbers would put the floods among Canada’s largest catastrophe losses: the 1998 ice storm had insured losses of about $1.5 billion in inflation-adjusted dollars; the Slave Lake wildfires in 2011 produced approximately $700 million in claims; and flooding along the Red River in Manitoba in 1997 cost insurers about $500 million.

Wayne Ross, vice president of national property claims for Aviva Canada, expects “the covered damages will likely pass what we experienced in Slave Lake.”

A.M. Best reports business interruption claims will be a major driver of insured losses in the wake of the severe flooding in Alberta. For optional flood coverage in commercial lines, it expects there is about a 75% take-up rate, senior financial analyst Jacqalene Lentz noted in a video from the company.

In downtown Calgary, the business district “was inaccessible for several days due to water damage, as well as a lack of electricity,” notes a weekly cat report, issued by Aon Benfield on June 28.

“The early indication is an obvious lower frequency (more based on exposure), but a higher loss due to the severity of damage incurred by business customers,” says Ross. “Commercial claims also tend to have a greater delay, as the assessment takes more time. Business interruption coverage also factors in to the overall severity of commercial claims.”

Ross points out that “many commercial customers locate heavy mechanical equipment in the basement, which is expensive to replace and affects their ability to conduct business.”

Based on news coverage and “reports suggesting $3.6 billion+ in insured losses, I would suggest much of the loss will come from personal lines (including automobiles), smaller commercial enterprises and infrastructure,” Josie Pachis, vice president of claims for Zurich Canada noted in early July.

A.M. Best reports “in personal lines, automobile insurers likely face exposure from claims on comprehensive policies.”

Of the significant number of calls Intact Financial Corporation received from customers by the end of June, these “relate to overland flooding, sewer back-up and coverage for cars which were damaged by water.” Adds Ross, “Sewer back-up in residential is most prevalent.”

Not all flooding damage is covered. “Overland flooding resulting in water overflowing onto dry land and causing damage is not covered in home insurance policies in Canada,” IBC reports. Some damage may be the result of sewer back-up, coverage for which is available, but must be purchased as an add-on to a home insurance policy.

It may be that the scarcity of property coverage for flooding in Canada will keep claims well below total economic loss. “A.M. Best believes that the industry currently is well-positioned from a risk-adjusted capital perspective to absorb the estimated insured losses, and underlying performance trends remain favourable.”

Urban landscape

“These floods have been particularly severe because the ground was already saturated, as the spring in southern Alberta has been unusually wet,” notes Doggett. “In some locations, soils just 50 centimetres below the surface had not yet thawed, forcing the rainfall to flow downhill and enter rivers and streams rather than soaking into the ground.”

The urban landscape may have made matters worse. “Increased urbanization (more pavement, etc.) and concentration of insured values in Canada’s cities alone (such as the huge condo building boom in Toronto) is leading to increases in damage when even just an average event occurs,” says Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction. “However, when you factor in degradation of infrastructure and climate change, these become multiplicative – not just additive – to the problem,” McGillivray notes.

His advice? “First and foremost is to stay off the flood plain, particularly the 1-100 year and lower flood plain,” he says. “The (Alberta) flooding came from a huge rainfall event, and many are shocked at the outcome. But should they be?” he asks.

“Municipal governments – and that’s where the rubber hits the road – must be far more stringent as to what they allow to be built, where they allow things to be built, and how they allow things to be built,” McGillivray says. “That new tower, subdivision or strip mall is great for adding tax revenue and allowing cities to reach their provincial government-mandated density goals, but it’s all for naught when you have to spend millions or billions rebuilding after a loss,” he comments.

“One of two things needs to happen,” Ross says. “Either building in flood-prone areas needs to stop, or steps to increase the municipality’s infrastructure/ability to deal with larger amounts of water.”

More frequent

“Global climate change predictions indicate we will see more frequent and severe climatic events. The problem is how they unfold on a global basis. Those types of events such as annual hurricanes are much easier to predict and model then 1 in 100 flood events such as the Alberta floods,” Pachis points out.

“Existing infrastructure can never guarantee complete safety or avoid losses associated with severe weather events,” Munich Re notes. “Flood protection works (and many other parts of the infrastructure) are designed to cope with ‘normal’ extremes, i.e. those that have a 0.5% to 1% chance of happening in any given year (100-200-year events). Extreme weather events o verwhelm such infrastructure and damage or destroy it.”

Munich Re reports that, worldwide, large floods have been relevant for reinsurance, which applies to commercial risks. “The losses of the (2011) Thailand flood had reached a level of a major hurricane landfall and the case will likely be similar in Calgary, given the scope of commercial risks which will be impacted. Reinsurance will play an important role in responding to losses where flood coverage was purchased and flooding caused the loss or damage, since many of the insurance companies providing such coverage would face enormous financial stress if reinsurance wasn’t available to backstop their losses.”

Intact reports its reinsurance coverage starts once damage reaches $100 million (pre-tax). RSA Canada, for its part, reported in July that it expects gross claims from the flooding to be above reinsurance retentions of $75 million, though it added a complete assessment will not be available for some time.

“Primary companies are becoming increasingly sophisticated in their risk management, but reinsurers have models and expertise that make us an ideal partner for primary companies,” Ludlow says.

“We believe that lessening the effects of severe flooding and preparing for future events in the province – whether that means investing in infrastructure, operationalizing practical, meaningful and cost-effective adaptation solutions or other prudent, preventative and protective measures, such as adapting land use planning practices – will be a point of discussion for government officials,” Intact notes.

“There’s got to be government involvement – not in insuring – but in better research and development and also better information,” Patrick Lundy, president and CEO of Zurich Canada, said of the Alberta flooding during the Canadian Commercial Insurance Summit in June.

“Swiss Re was recently involved in an extensive study with New York City which was aimed at identifying ways it could increase its resilience to climate change and severe weather events,” says Ludlow. “Collaborative projects like this, bringing in many stakeholders, are a great way to identify areas that need improvement and the ways to do so.”