Tool For Adaptation

The Insurance Bureau of Canada (IBC) has been pressing the issue of Canada’s aging water and sewer systems in recent years, particularly because of the threat of climate change and increased levels of heavy rainfall in key regions. However, many municipalities are overwhelmed by the sheer magnitude of the problem and the required investment. Should they invest in sewer systems? Wastewater treatment plants? Flood diversion plans?

In short order, they will have at least one part of the answer. The insurance industry is in the process of developing a risk assessment tool that municipalities can use to pinpoint the most vulnerable areas of infrastructure and direct funds accordingly. Insurance companies will also have the tool to rate and price property risks accurately.

IBC’s Adaptation to Climate Change Committee recognizes that the world’s changing climate is trending towards an even higher frequency of heavy rainfall. The concentration of rainfall in massive downpours and violent storms has increased dramatically in recent years. Losses related to water damage are now the leading cause of personal lines property claims in Canada, costing the industry and policyholders about Cdn$1.5 billion per year.

We don’t have to look far for recent examples. In 2006, one 15-minute downpour along the Don Valley Parkway in Toronto caused Cdn$500 million in property damage. In Hamilton, Ontario, 6,000 houses suffered water damage after two days of torrential rains late in July 2008. More recently, Environment Canada issued a warning on Nov. 14 for severe flooding and landslides across British Columbia’s south coast; more than 300 millimetres of rain was expected in three days — almost twice the average monthly downpour for November.

Our cities’ and towns’ aging infrastructures are on the front lines of this climate change activity. If there is a heavy downpour or violent storm, many sewer and surface water systems simply cannot handle the amount of water. Flooding is the inevitable result.

The insurance industry is not the only group to notice this. In its own studies, the Federation of Canadian Municipalities has indicated there is a deficit of more than Cdn$12 billion in sewer and surface water infrastructure in Canada.

So the question becomes: How do we tackle this deficit? We need to collect specific information to back up the need for infrastructure spending in critical areas. What needs to be fixed and where? What municipalities face the most imminent risk? For larger cities, which neighbourhoods require the most urgent attention? In short, we need better analytics and better data.

This is why IBC’s Adaptation to Climate Change Committee is creating a municipal risk assessment tool designed to collect key data that will help both cities and towns in their infrastructure planning and allow the insurance industry to understand the risk of future claims. This latter point is important.

Insurers currently have fairly good retrospective data upon which to base their pricing. They can rely on claims histories to tell them at least part of the risk story. However, another part of the story can be told through the use of prospective data. For example, houses that suffered water damage in Hamilton were not located in a traditional “hot spot” for these kinds of water damage claims. It would have been very difficult, if not impossible, to forecast this event based on retrospective data.

The municipal risk assessment tool will address this “information gap” by collecting and analyzing key municipal data in the:

• age and design of sewer and surface water systems;

• maintenance and operation of those systems;

• urban development policies that influence system capacity; and

• topographical features like elevation and soil type, which affect risk and vary broadly within large urban centres.

Collection of this data will allow the insurance industry to make a step change improvement in its ability to accurately rate and price property risks related to heavy rain and spring thaws. Companies will take the prospective data gleaned from the tool and combine it with their own retrospective data to get accurate risk ratings specific to their needs. Think of it as the ability to look forward, as well as back.

The more accurate business rating tool will also mean companies can write business they may not have considered before, enhancing competition, making insurance more available and creating a more rational pricing system.

However, the risk assessment tool is also a change management opportunity for cities and towns across Canada. The data insurers collect and analyze for rating purposes will be shared with municipalities and provincial governments. Information provided by this tool will allow government to prioritize their investments and deal with the greatest vulnerabilities first. It will give infrastructure spending a kick-start.

That’s a tall order. Many may ask: How do we actually get a somewhat staid subject like infrastructure spending to become a hot topic for municipal chambers and government water coolers across the country? First, we have to show how it could work in actual communities.

A pilot project for the risk assessment tool is in the approval process and Cdn$1 million in initial funding has been earmarked for the project. The federal government has provided half of these funds, a commitment that bodes well for buy-in from all levels of politicians. The pilot will cover 10-15 small and mid-size municipalities in Atlantic Canada, and also involve Hamilton to validate elements of the tool that are specific to larger urban centres. Regional industry workshops are being conducted to gather industry guidance and feedback on the current development of the tool, and future phases of the project.

Given that Canada has more than 3,700 municipalities, the insurance industry will require ongoing discussions about the best ways to collect and disseminate the technical information once the tool has been validated with case studies. This initiative will have several stages, but the technical scoping work has already begun.

With the risk assessment tool, the insurance industry is staking the high ground on the issue of adaptation to climate change. As it rolls out, it will clearly be a valuable way for insurers to better understand risk, improve pricing structures and treat customers fairly. The industry could have simply stopped at that.

But by making the tool widely available to different levels of government, we are encouraging forward thinking and a responsible approach to the realities of climate change. Think of it as a gentle nudge to begin the urgent and massive work on infrastructure investment.

Our industry is also providing data-driven, fact-based and objective measurement tools to quantify risk and suggest prudent strategies to address that risk. We are showing that we can be invaluable partners in addressing one of the most urgent issues of our era.

The municipal risk assessment tool is a vital project for the insurance industry, governments and all Canadians. It is one crucial part of what has to be a comprehensive plan to adapt intelligently to the very real challenges of climate change. There is a role for all levels of government, industries and citizens to play in this adaptation — from representation at international meetings such as the UN Climate Change Conference in Copen- hagen, to the use of powerful economic incentives to encourage change in consumer behaviour and individual responsibility (i. e. reducing water usage through things like rain barrels).

This risk assessment tool will provide the data insurers need to understand risk and the information municipalities need to invest wisely with scarce resources. It also provides an excellent illustration of the old adage: ‘Think globally, but act locally.’