Water Logged

              

There is no getting away from water in Canada's property and casualty insurance industry. Protection is available for much of the damage that water can do on the residential side, but not all. Will the overland flooding options now becoming available help cap the flow or will leaks in coverage remain? And what might this evolving environment mean for insurers and reinsurers alike?

Ask those in Canada's property and casualty insurance industry if they have concerns about water-related losses and their responses are likely to mirror those elsewhere in the world: a definitive "yes."

"Water-related losses, which incorporate any type of loss where water is involved (that is, weather and non-weather-related) continue to be the largest single driver of personal property claims in the country," says Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction.

Veronica Scotti, president and chief executive officer of Swiss Re Canada, notes that over the last 10 years, there has been a significant upward trend of more frequent and severe weather-related losses across Canada. "This trend is alarming, and if we consider some of the climate scenarios for the year 2100, it could become an even greater threat," Scotti cautions.

Projections in the latest study from the Intergovernmental Panel for Climate Change (IPCC) include that the 20-year, single-day rain event could potentially occur every five years in Canada, she reports. "People often ask, 'Can we afford to adapt and mitigate?' But I would ask, 'Can we afford not to?'" says Scotti.

"Water-related property losses have been on a steady increase for some time," says Glenn Cooper, senior manager of public relations and social media for Aviva Canada. Looking specifically at his company's figures, Cooper reports that water damage claims accounted for 44% of dollars paid out on all property damage claims in 2014 compared to 39% a decade earlier in 2004. "The average cost per residential water damage claim has also increased significantly - going from $11,709 in 2004 to $16,070 in 2014, a 37% increase," he points out.

But these are losses that are currently insurable. What about situations in which overland flood losses are being absorbed by insurers (even though they are not technically supposed to be), that are most certainly being absorbed by governments through disaster assistance, recovery and rebuilding, or that are being absorbed (with no return) by individuals and communities alike?

Long a topic of conversation, debate and consternation, residential losses flowing from overland flooding - at least until this spring - were not covered anywhere in the country. But the devastation and expense of two different flooding events in southern Alberta and the Toronto area two years ago have pushed the issue, the discussions and proposed solutions to the fore.

ON THE RISE

"Over the past two decades, storms and floods have increased in frequency by a factor of 20, making overland flooding the most frequently occurring natural disaster and the one that affects the most people worldwide," comments Lapo Calamai, director of catastrophe risk and economic analysis, Policy Development, at Insurance Bureau of Canada (IBC). "Between 1900 and 2012, there were 289 significant floods in Canada - the equivalent of more than two major floods every year - representing almost 40% of all natural disasters ever recorded," Calamai reports.

Citing the continuing upward trajectory of water losses, McGillivray says an ongoing challenges for the insurance industry is "we have what amounts to a fire policy (designed for low-frequency/high-severity events) responding to water losses (which can be more scattered, depending on what you are looking at: low frequency/low severity, high/low, low/high, high/high)."

Peter Morris, president of Robertson Morris Consulting, reports that a number of factors are driving losses: climate change, aging urban infrastructure that is not being adequately supplemented to handle the increased concentration of population, and policyholders having "deeper basements with expensive finishing and contents."

"A big factor is the densification of cities, where we are seeing less and less permeable ground cover, and more pavement and roofs," McGillivray says. "When you get even a moderate rainfall event, the water often has nowhere to go. Couple this with climate change (more and more intense rainfalls) and you have a big problem."

LOSSES ALL AROUND

That problem became crystal clear with the Calgary and Toronto events of 2013. "The combined insured losses were approximately $3 billion, of which 35% to 40% was covered by insurer and 60% to 65% by reinsurer," reports Christoph Oehy, head of treaty underwriting for Swiss Re Canada. "Besides these large-loss events, there are obviously series of smaller events with localized pluvial and fluvial flooding," Oehy says.

The story is far different this year. "By mid-June 2015, the Canadian market did not see any major water-related activity that would be noticeable to the reinsurance industry," points out Joseph El-Sayegh, senior vice president of property and casualty, Canada for SCOR Canada Reinsurance Company. "While we have had some isolated events in Manitoba, British Columbia and Alberta, their consequences were concentrated and limited," El-Sayegh says.

Calamai does not see residential flood in Canada as a reinsurance issue right now, in light of the fact that "global reinsurance markets (Canada included) have plenty of available capital and the necessary risk appetite to take on more of the exposure that is unlocked as flood insurance becomes available in the primary market."

Unlike earthquake, "flood is not a 'tail' risk, meaning that hedging for the potential losses does not require that much capital," Calamai explains. "If climatic trends worsen significantly over the next few decades, resulting in more extreme and more frequent flood events," he notes, "flood risk could start to be seen as a tail risk, too," he adds.

"Regardless of the definition used for residential flood (including sewer back-up, riverine flood, storm surge or flash flooding), its insurance will become a reinsurance issue in Canada," El-Sayegh says. "The treaties that cover the cedents in the Canadian market typically do not exclude flood. The flood exclusion is enforced at the insurance policy level and the reinsurance market is counting on the quality of the underwriting of the insurance companies to mitigate the exposure," he explains.

"When insurers discuss the expansion of the product offerings to include excluded perils such as flood insurance, it exposes the reinsurance contracts to larger exposures that need to be identified, analyzed and quantified. The insurance and reinsurance industries at this stage are working together to reach that level of understanding," El-Sayegh says.

Overland flooding "potentially has a huge impact on reinsurance because it totally changes our view to, obviously, an aggregation of loss," Philipp Wassenberg, president and chief executive officer of Munich Reinsurance Company of Canada, said during a recent panel discussion in downtown Toronto.

"The fact is in most reinsurance treaties... if it's not getting in there, it's covered. So we have to find answers how to understand the risk and know what kind of aggregation it means," Wassenberg told attendees.

"As insurers begin adding overland flood coverage to their homeowner policy wordings, reinsurers will be called upon to contribute in the event of a natural catastrophe and will, therefore, be affected to an even greater extent by these weather events than has been the case until now," Morris predicts.

"Reinsurers are using their data to gain insight and build tools to help insurers get ahead of the issue," says Marilyn Horrick, national vice president, GUARANTEE GOLD for The Guarantee Company of North America. "We, too, are managing our exposure in developing risk strategies, including underwriting tools necessary to avoid adverse risk selection and, for the customer, offer targeted mitigation and prevention advice."

ON OFFER

But the lack of available overland flood models - until recently, at least - has made risk assessment difficult.

This March, however, Willis Re introduced a suite of flood analytics for the Canadian insurance market designed to provide insurers the means to develop and enhance underwriting and risk transfer strategy, manage and monitor portfolio accumulations, and calculate probable maximum loss estimations.

"Insurers need to leverage the latest science and analytical methods to evaluate and manage local and regional flood exposure," Geoffrey Lubert, managing director of Willis Re Canada, noted in a statement at the time.

Guy Carpenter & Company LLC also introduced a new Canada flood model focusing on riverine flooding, with the view being that that "captures the majority of the hazard," Joseph Becker, company research hydrologist, said in April. Currently, the flood model evaluates fluvial (or riverine) overland flood risk, together with the off-plain component of such events.

Scotti's view is both risk awareness and risk assessment capabilities have greatly improved over the last two years. "For example, flood zones are now widely used in the underwriting process and flood-modelling tools are becoming available to better assess the accumulation risk. These advancements clearly prepare the grounds for residential flood products," she says.

This, in fact, started to happen this spring: The Co-operators Group Limited is now offering a flood product in Alberta, available as an endorsement to the insurer's homeowners' insurance policies and which provides protection against water and sewer back-up, water from intense rainfall and overland flooding from an overflowing body of water such as a river or lake; and Aviva Canada is offering coverage in Ontario and Alberta, available as an endorsement to personal property insurance policies that have sewer back-up protection in place, and "covers most aspects of water entering a home and causing damage - including overland water," notes Aviva Canada's Glenn Cooper.

But are the current residential flood offerings "true" overland coverage?

Morris says "yes," noting that each has stipulated the coverage is only available as an add-on to policies that already have sewer back-up coverage.

Characterizing them "a great first step," Calamai suggests that the biggest value of the new offerings may be that insurers are showing they are "ready to step up and innovate to serve the public."

Despite that positive, though, "the insurance industry on its own will unlikely be able to ever provide fulsome coverage for everyone, especially for those who need it the most," Calamai says. "The international experience tells us that a portion of Canadians, those located in the highest-risk areas, may never be eligible for coverage - or may be offered limited products and/or be faced with potentially unaffordable risk-based premiums. That's just the basic economics of flood insurance," he says.

But Leonard Sharman, senior advisor of media relations for The Co-operators, says the insurer's water endorsement is not meant solely for areas with a small risk of flooding. It is meant "to meet a previously unmet need," Sharman says.

"Recognizing that those at a high risk of flooding would pay an appropriate amount in terms of premium, we built in flexibility to allow those clients to manage their premiums," he notes. Users can select the amount of coverage and deductible, which is offered as a percentage of claims, to suit their particular comfort level, he explains.

In addition, discounts are offered for clients who take certain preventive measures, including installing backwater valves or sump pumps with back-up power, and compensation is available to clients who protect their property in advance of a flood.

At Aviva Canada, "while we cannot offer the product to everyone, the vast majority of our customers will have coverage available to them," says Cooper. The overland water component of the insurer's property water protection package "is a new peril for personal lines insurers, and there is an incremental premium associated with the risk. As with all insurers, there will be some eligibility criteria, including some exclusions."

Donna Ince, senior vice president of personal insurance for RSA Canada, reports the insurer is now developing "what we believe to be a more comprehensive water damage solution than the historic market offerings. We are participating with IBC habitational committee as we build our revised sewer and flood wording that will ensure we learn from the shared industry knowledge."

The company is "looking to announce further details on our new overland water strategy in the months to come," Ince says.

"The expectation is that within the next few months many insurers will provide coverage, in one form or another," says El-Sayegh. "There are no expectations that the private industry will be able to cover all exposures. Therefore, the involvement of the government will still be required, especially to ensure that high exposure risks are protected," he comments.

"While there's still debate on how to manage the needs of those most at risk, it has started a dialogue that wasn't happening before," Horrick says of the release of new flood products. "Companies, including ours, are coming to market with viable solutions from policyholder communications to enhanced coverage."

But is the innovation to date enough?

Morris notes that adverse selection is a major challenge. "Without an adequate spread of risk across a broad range of policies with varying degrees of exposure, it is difficult to generate the premium necessary to cover the losses," he says.

"To the extent that coverage is only offered to customers with a manageable exposure to overland water, the cost of providing the coverage should be fairly reasonable," he says. But for homeowners with a severe exposure, "it will be a challenge to provide the coverage at a reasonable price, especially for those homeowners at most risk of having an overland water loss," he adds.

"For more than 90% of the homeowners across Canada 'overland flood' coverage should be possible and affordable," Oehy says. "There can be regions where flood coverage is very restrictive or cost-prohibitive due to the high risk of flooding. For these high-risk properties, a partnership between the public sector and the insurance industry is needed to provide a sustainable solution," he notes.

For the highest-risk properties, "a purely private, risk-based product for those high-risk consumers is likely to face significant availability and/or affordability constraints," Calamai notes.

For the highest-risk priorities, "what needs to happen is a public-private partnership between insurers and governments at all levels. It requires a degree of risk-sharing between all stakeholders, and clear roles and responsibility for all - including responsibility around financial risk management as well as risk mitigation."

Cooper agrees. "Maintaining the availability and affordability of the product requires collaboration and commitment from all levels of government in Canada," he suggests.

"For the majority of insureds, overland residential coverage can be economically accessible and the viability of which is dependent upon the collaborative efforts of government, insurance industry and homeowners," Horrick adds.

Actions taken by all levels of government to reduce the risk of flooding and water damage must include "increased investment in new infrastructure and updating building codes to reduce the impact of future storms on businesses and personal property," Ince notes.

"Insurance (and, therefore, reinsurance) of this risk is possible provided there is transparency in the coverage offered, as well as transparency between the various government agencies and the insurance and reinsurance industries regarding the mitigation factors implemented," El-Sayegh comments.

"It seems that some of the new flood products are bundling all water damage claims together, whether sewer back-up and overland flood; while others are keeping the overland flood product optional as an add-on to the existing sewer back-up coverage," he observes.

"As we saw in 2013, the cost of water-related losses to insurers and reinsurers can be significant. Introducing new flood insurance products that more clearly outline the coverages and the costs of such coverages will help insurers and reinsurers better anticipate the losses and include them in their capital requirement calculations," he says.

"The market will, ultimately, demonstrate to what extent this is a commercially viable proposition - and to what extent consumers have the resources to take this on," Calamai points out.

ACCESS TO DISASTER ASSISTANCE

If "overland flood" coverage is available, what does that mean for currently constituted disaster financial assistance arrangements (DFAA), which do not apply to insurable loss?

Morris notes that availability is, ultimately, a political question.

"With coverage now being available in the open market, it is unlikely the federal and provincial governments will feel compelled to provide financial assistance to homeowners who have chosen not to purchase this coverage," he suggests.

"Technically, through disaster financial assistance (DFAA), only payments for damages that could not have been reasonably insured are eligible," Calamai explains. "Whether or not, following a disaster, the government would deem flood risk to be eligible depends on several factors, including availability, affordability, take-up by consumers and possibly even public awareness."

Scotti's view is that, at this stage, it is probably too early to consider residential flood as an insurable loss in the context of DFAA. "However, if the product becomes widely available to the consumer and they have a choice to include or decline this coverage on their policy, then residential flood is insurable."

Morris's advice to brokers? "The safest course of action will be for the broker to offer the coverage to the client rather than avoiding the discussion and placing coverage with an insurer that does not offer overland flood coverage," he says.

MITIGATION EFFORTS

A new study - commissioned by The Co-operators and released in May -assesses the level of preparedness of 15 major Canadian cities for flooding caused by extreme rainfall, relative to 16 areas of flood vulnerability.

Among the strengths identified are that most Canadian cities require backwater valves for new home construction, up-to-date flood plain maps are being developed, land use planners in most cities are using the maps to restrict building in flood-prone areas, and urban drainage maintenance is on the rise.

Work in this area will continue, directed by the recently announced Partners for Action (P4A) applied research network at the University of Waterloo, which is co-founded by The Co-operators and Farm Mutual Reinsurance Plan. The work of P4A, meant to bring together stakeholders, will include monetizing economic costs and benefits of adaptation, and promoting the need for improved flood mapping country-wide.

At an IBC symposium this spring, Swiss Re Canada's Christoph Oehy said "the risk assessment for flood is complex and flood hazard maps are a necessary precondition to make insurance possible."

Based on fluvial flood exposure in Canada, Swiss Re estimates about 9% of the residential insurable values are at risk of flooding at least once every 100 years, and about 3% at least once every 50 years, while "almost 85% of the residential insurable values are only very remotely exposed to fluvial flood risk, meaning they are outside of the 500-year flood zone," he said. "Probabilistic flood models are needed. They allow getting the complete risk picture and help to understand the accumulation risk taking into account the correlation along the river network."

Detailed information is essential when it comes to modelling flood risk and estimating potential losses, Vaclav Rara, a flood model developer and hydraulic modeler at Aon Benfield in Prague, emphasized during the Toronto installment of Aon Benfield's Catastrophe Analytics Roadshow in June. Hazard perimeter "can vary in fewer metres by metre," said Rara, who served as part of the team that created the company's new probabilistic flood model for Canada.

IBC, for its part, has engaged JBA Risk Management to "develop a best-in-class flood model customized for Canada, building on best practices in modelling methodology and using all available input data," Calamai reports.

Expected to be completed by the end of the year, the model will include both fluvial (riverine or on-plain) and pluvial (urban or off-plain) flood risk, and will provide a consistent view of risk for virtually the whole of Canada, he says.

"There is a lot of momentum on the overland flood topic across the whole insurance industry, but also including governments, brokers and reinsurers," Scotti says. It "needs to be maintained so that in the near future, Canadian homeowners can get wide access to insurance for overland flood across the country."

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Thank you for reading and stay safe

Darren Miller