Preparing for the worst

As the old saying goes, those who ignore history are doomed to repeat it. That’s why some form of publicly funded program should be created for Canadian cities that wish to heed more than a decade of advanced research and warnings by the Canadian insurance industry and take preventative action before Canada meets up with its own version of New Orleans.

This is a timely matter, because weather-related damage seems to be occurring with alarming regularity in our world, as noted in the 1999 report, “An Assessment of Natural Hazards and Disasters in Canada,” which was funded in part by Environment Canada and Public Safety and Emergency Preparedness Canada. “Since World War Two,” the report notes, “there has been an increase in the incidence of weather-related disasters – notably flooding – compared with geophysical disasters such as earthquakes. There is good reason to believe that even more devastating weather disasters will occur in the future because scientists anticipate that global climate change will be accompanied by increases in both the frequency and intensity of extreme weather events.”

In other words, it simply will not do to have media headlines constantly reassuring us that the latest natural disaster was – yet again – a ‘once-in-lifetime’ event. The underlying assumption is that it is impossible to assess the risk of random, freak weather storms or geological events like earthquakes. But how truly nebulous is the business of assessing catastrophic risk? Insurers have been warning about these kinds of events for decades. The more relevant observation may be: what is anybody doing about managing these risks?

It doesn’t always take state-of-the-art, scientific modeling programs to portend a disaster in the making. The truth is, a few days before Hurricane Katrina’s Category 4 winds hit the Louisiana city, it was widely reported that sections of New Orleans were built 10 feet below sea level. The pre-Katrina media reports also noted that New Orleans had a complicated levee system that could not withstand much more than a Category 3 hurricane.

Granted, it’s one thing to observe this three days before a pending hurricane, but quite another to pay the costs in advance to mitigate the damages wrought by the elements.

It is intriguing to note in this context that the United States once had a natural disaster mitigation program called ‘Project Impact.’ Launched by the Clinton administration in 2000, Project Impact provided seed money to various communities for undertaking pilot projects that would decrease the risk of potential disasters. Seattle, for example, received $40 million to structurally retrofit public schools to avoid earthquake damage; the city also receive money to seismically retrofit 2,000 wood-frame, single-family homes.

Of course, governments, often in the name of fiscal prudence, will typically balk at fronting billions of dollars to fix something that hasn’t been damaged yet. But Paul Kovacs, the executive director of the Institute for Catastrophic Loss Reduction, quite rightly points out what many insurers who have lobbied the Canadian government for Project Impact-style prevention programs must be thinking: “New Orleans, if they had spent $10-14 billion, could have avoided $200-billion worth of damage. [Insured losses due to Katrina are currently pegged between $40 billion and $60 billion.] Afterwards, they can say, ‘Well that was cheap, I wish we had of done it.’ But at the time it was $10-14 billion and that’s a lot of money.'”

It makes sense, therefore, for the Canadian government to make a fund available to communities that want to undertake necessary disaster prevention measures but can’t support the programs financially.

It is worth noting that in the United States, Project Impact is all but a shadow of itself now – and history is unfortunately marching along a course anticipated by the insurance analysts. As this issue goes to press, the United States is still digging its way out the destruction wrought by Katrina. The State of Louisiana and its insurers are mired in arguments and regulatory civil actions over what is wind or flood damage. And the situation only got worse when Hurricane Rita followed closely on Katrina’s path.

Is there a lesson Canada might learn from the example of our southern neighbours?

First, there are risks of living in Canada. They have been thoroughly identified in many government and insurers’ reports, including the 1999 report noted above. “In this country, Prairie droughts have been the most costly, accounting for some $16 billion in losses in the past quarter century,” the six-year-old report notes. “However, the 1998 Ice Storm [between eastern Ontario and New Brunswick] was the single most expensive event for the Canadian insurance industry, which paid out about $1.8 billion – only about a third of the total estimated cost of $5.4 billion. Hailstorms in Calgary and major floods in Quebec and Manitoba also resulted in insurance claims in the hundreds of millions.”

And let’s not forget the potential occurrence of what all insurers will tell you is Canada’s version of The Big One – a powerful earthquake with an epicenter near Vancouver, Montreal or Ottawa. Insurers will tell you a Vancouver earthquake might cost up to $32 billion in damage, of which the insurance industry would be on the hook for $11 billion.

And so while property and casualty insurers are paying out current claims in full and issuing their risk assessments for the future, are federal and provincial governments helping their communities to manage the risks? Where is Canada’s “Project Impact,” which will provide a financial incentive to mitigate potential losses and avoid turning a nasty weather event into a national tragedy?

These are important questions to answer sooner rather than later, if we want to avoid the Canadian equivalent of New Orleans.