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Insurance against disaster

Extreme weather events, linked to climate change, are forcing credit unions and their members to look hard at their personal and home insurance to better prepare for increasing risk.

Record-breaking cold temperatures across Canada this past winter. Relentless forest fires in British Columbia last year, as well as in northern Alberta in 2016. Devastating flooding in Calgary and reckless ash floods in Toronto in 2013. Such extreme weather events are becoming more common and intense — and experts say climate change is largely to blame. “Climate change is real, it’s irreversible and the extreme weather events are only going to get more extreme,” says Dr. Blair Feltmate, head of the Intact Centre on Climate Adaptation at the University of Waterloo’s Faculty of Environment.

Severe weather events aren’t just calamitous for victimized communities but also have cost implications for the insurance sector and Canadians as a whole. That includes higher insurance premiums and increased risk of mortgage and loan defaults. Extreme weather is also putting added pressure on aging infrastructure, including roads, bridges, water and sewer systems and homes across the country. In the absence of aggressive adaptation programs to limit such climate impacts as residential flooding, which is the top factor affecting catastrophic loss claims in Canada, residential and property and casualty (P&C) premiums will increase, says Feltmate.

Rising costs

Extreme weather-related property and casualty insurance payouts have more than doubled every five-to-10 years since the 1980s, according to the Insurance Bureau of Canada (IBC). Payouts exceeded $1 billion in Canada for the past seven out of eight years leading up to 2016, compared to average annual payouts of $400 million between 1980 and 2008. “Given these trends, we are expecting losses to mount further,” says Craig Stewart, vice-president, federal affairs at IBC.

According to IBC, the most expensive insured natural disaster in Canadian history was the 2016 northern Alberta wild fire, estimated to cost $3.6 billion, followed by the Alberta floods in 2013 at around $1.7 billion. Flooding overall is now considered the most frequent and costliest natural disaster in Canada and is both unpredictable and indiscriminate. Consider the rainstorm that hit the Greater Toronto Area in 2013, causing about $940 million in insured damage. In September 2016, floods damaged more than 1,700 homes, leading to a state of emergency in the Ontario communities of Windsor and Tecumseh, according to a University of Waterloo (UW) study released last year called Canadian Voices on Changing Flood Risk. A month later in Nova Scotia, the community of Sydney set a new daily record for rainfall that led to flooding of homes. Since 2000, Canada has experienced about 80 severe flood events, the UW report stated.

Canadians aren’t prepared

Despite the increasing threat and rising costs of severe weather events, in particular flooding, experts say Canadians are ill prepared. “Canadians’ self-assessment of flood risk does not align with actual risk,” notes the UW report, which included a survey of 2,300 Canadians living in high-flood-risk
areas. Nearly three-quarters of respondents didn’t believe they were vulnerable to flooding. Only six percent knew they’re located in a designated flood risk area. The study also remarks that “an alarmingly low number of homeowners,” or only 21 percent, believe that the risk of flooding will increase over the next 25 years. The report describes this lack of risk awareness as “worrying,” adding that some provincial governments are no longer willing to provide disaster assistance when insurance is available. “Failure to protect property or purchase insurance coverage will leave homeowners solely responsible for damage costs and increase the risk of mortgage defaults,” the report states.

“Credit unions are learning from extreme weather events in the past and regularly working on updating their best practices and member offerings and assistance.” – Heather Olson

The UW survey also states that 83 percent of Canadians believe they have a responsibility to protect their own property from flood damage, yet take little action. Less than 30 percent of respondents use property-level flood protection, such as sump pumps, water-resistant materials in basements and rain barrels, the report says. “They also express limited demand for overland flood insurance that would help them recover from flood damage, with 50 percent saying they would not consider purchasing coverage.”

According to the IBC, about 19 percent of Canadian households are at risk of river and overland flooding. “For areas where flood insurance coverage is limited or not available, and where Canadians are at high risk of flooding, this conveys a significant economic concern,” according to the 2017 report Preventing Disaster Before it Strikes, published by the Intact Centre on Climate Adaptation, a research centre at UW. The risk is exacerbated by the financial stress families are feeling. According to the Canadian Payroll Association, nearly half of Canadians are living pay cheque to pay cheque. Consider, too, Statistics Canada data showing Canadians currently owe an average of about $1.71 in debt for every dollar of income. “With limited flood insurance coverage, some homeowners in Canada may not be able to pay for flood damages when the next flood strikes.” Such limited liquidity to redress flooding may result in some homeowners defaulting on their mortgage, the Intact Centre report warned.

A recent statement from Intact Financial Corp., cited by the Intact Centre, notes that water damage is the leading cause of personal property claims and that water losses for personal property claims have doubled to 40 percent over the past decade. “There are a number of improvements that Canadians can make to better protect their homes and communities against water damage.” By taking such steps, Intact forecasts Canadians could lower their annual premiums by between five and 15 percent. “Those who live in municipalities who make climate resilient infrastructure a priority could also benefit from more affordable premiums, higher coverage limits and enhanced insurance coverage.”

As awareness of the issue increases, insurance companies are offering more products to handle flooding but a much broader conversation is also starting to take place — including between governments and affected industries — to prepare all stakeholders for what’s expected to be a growing risk from several weather events. “The priority is how to inform customers as to the risk, whether you’re a real estate professional selling them a house or a credit union lending money or writing a mortgage,” Stewart says.

Implications for credit unions

The worse the extreme weather gets, the easier it becomes for people to understand that climate change is a problem that affects everyone — not just those in flood, fire or hurricane-prone regions of the world. Feltmate says that credit unions should take advantage by promoting insurance options as well as educating members about the risks, as well as how to protect themselves, their assets and their belongings.

Not only is it a value-added service but will also help to keep premiums to a minimum for members and lower claims and costs for insurance providers, Feltmate says. It will also help homeowners to secure mortgages. “They won’t see people defaulting on mortgages when they are flooded out of their basements and don’t have appropriate monies to cover those losses,” he adds. “The credit unions, which sell themselves as part of the community, are part of the equation to promote flood protection.”

To reduce risk, the financial services industry needs to adapt and promote best practices with consumers. Feltmate says the process should start when homeowners approach a credit union to get a mortgage. Credit unions should talk about more than interest rates and payment plans but also the risks of events such as flooding and fire and how homeowners can protect their property through insurance. This includes everything from installing smoke detectors to ensuring valuables aren’t left in cardboard boxes in the basement where they’re at greater risk of being damaged in a flood. “They should be explaining to people what key vulnerabilities are and how to mitigate them,” Feltmate says.

Feltmate adds that the Intact Centre is also working with colleges, starting in Ontario, to develop a course on home flood risk assessment that will be part of the curriculum for home inspector training and accreditation. “This will be a very big step going forward to limit residential basement flood risk driven through the buy/sell cycle of homes,” Feltmate says. “For example, every time a house is bought or sold, it will go through a rigorous assessment for flood risk vulnerability and how to correct any deficiencies. Credit unions should be supporting — indeed demanding — this new initiative.”

Heather Olson, vice-president of the Credit Union Insurance Services Association (CUISA), says the industry is working to provide members with more information and to better understand the risks of severe weather events. Credit unions are also working with insurance partners to ensure their customers are informed about the risks and what options they have regarding coverage. “We do look to make sure we are being as proactive as possible in making sure everyone has the coverage they need and advice on coverage available to them so that they can make that informed decision,” says Olson, who is also regional sales leader at Island Savings, a division of First West Credit Union (230,000 members, $9.9 billion in assets).

Credit unions are learning from extreme weather events in the past, Olson says, and regularly working on updating their best practices and member offerings and assistance. “It has enabled us to create a response plan and be more proactive in assisting our clients and make sure we are assisting them as best as we can.”

It’s especially important given that climate change is forcing the insurance industry to regularly review its risk and ratings. That, in turn, is keeping its customers — including credit unions and its members — to stay on top of the changes. “For us, things are constantly moving and changing,” says Olson. “That is our new trend, where before it was kind of status quo year after year. Every year now, we’re having those in-depth conversations with our customers to make sure that they understand what’s changing, why it’s changing and providing them with advice and the reasoning behind it.”

Credit unions and their partners need to ensure members are aware of what coverage they have — and don’t have — and to help them through any claim process.“Insurance isn’t something people love to pay for,” says Olson. “In the event that anything does happen, it’s never going to be a pleasant or fun experience. It’s making sure there’s an understanding of what your policy covers, so there are no surprises.”

Shifting the responsibility

As more sectors work together to help manage and mitigate the risks of climate change, the goal is to shift more of the responsibility on the homeowners and the industries that support them. This, according to Craig Stewart of IBC, is a more sustainable approach over the long-term. “Presently, we are in a system that is backstopped by the taxpayer: when your home is flooded, Canadians believe government is going to bail them out,” Stewart says. But Canadians can’t continue to rely on government bailouts. “Given the increasing losses that we’re seeing, this is not a sustainable approach. More and more, we are recognizing that Canadians need to be protecting themselves from the risks that they face.” ◊