De-Risking the Future
As any intelligent person on the planet now understands, we are experiencing climate change. The buildup of greenhouse gases in the atmosphere over the past century (especially recent decades) has caused the Earth to warm. As the Earth warms, ocean waters expand and ice melts, raising sea levels. The cycle of rainfall and evaporation accelerates, leading to more severe droughts and more severe precipitation. Heat waves, tornadoes, hurricanes, typhoons are all more frequent and intense. The “100-year storm” insurance adjusters referenced in their policies now seems to come every year, with costly social, environmental, and economic impacts. In the face of this, there is uncertainty about what the human race should do (see page 4 about the recent UN climate meetings in Peru).
The insurance industry doesn’t like uncertainty. Nor do banks. Climate instability is also leading to instability on corporate balance sheets and in financial markets. The levels of risk are being elevated everywhere, not just on the political stage.
Neetika Sathe, VP at PowerStream Inc., a progressive power utility in Ontario, understands the need to manage this risk. She said recently that “climate change is driving utilities to invest in resiliency, reliability, and providing more energy choices for consumers.” Clearly the status quo is not cutting it anymore.
Kathy Bardswick, CEO of The Co-operators Insurance Group, recently gave a presentation at the University of Toronto on weather-related catastrophic losses. After the event, I asked her a few questions: “How can insurers still offer property insurance in places like New Orleans and High River, Alberta? Are the premiums in line with the risks there?”
She replied, “The short answer is this: In the U.S., flood coverage is highly subsidized and fails to reflect the true cost of insurance coverage in some geographies. As a result, silly behaviours continue, such as rebuilding in flood zones. In Canada, there is no overland flood coverage, so events like High River are only partially covered by insurance. The Federal Disaster Response Plan then kicks in. Given the significant cost and frequency of sewer backup events, the insurance industry is now either increasing deductibles, capping coverage, or both. And, of course, premiums are going up.”
Bardswick explained how Canadians’ catastrophic-loss expenses went from less than $400 million per year in 1987 to more than $3.2 billion in 2013, with the four years before 2013 each costing the industry more than $1 billion per year. Water-related disasters are now the most common and most costly type of natural disaster in Canada. Perhaps coincidentally, Canada is the only G8 country that does not offer residential overland flood insurance.
In her presentation, Bardswick concluded with what she thinks are three winning conditions that must be established to help de-risk flood potential in Canada:
1. Canadians understand the risk that flooding presents to their homes, businesses, and communities;
2. Canadian decision-makers use their understanding of flood risk to make sound adaptation decisions; and
3. Canadians have access to means to transfer the risks associated with flood damage that remains after they have engaged adaptation.
We each have different thresholds of risk, but as extreme weather hits with more frequency and intensity—as “Snowmageddons,” epic floods, prolonged droughts, and crazy weather drive up the cost of insurance and infrastructure—our reaction will be the same. We will all want some certainty.
I doubt the federal government in Canada will take the lead on de-risking our future. It will be corporate leaders, like Sathe and Bardswick, and provinces, like British Columbia, Quebec, and Ontario, that will tackle the adaptation challenge and help us weather the storms.
Todd is the founder of this magazine and has a sewer back-flow prevention device installed in his basement. Do you?