Here at Impact Infrastructure central HQ, in Toronto, we are in the midst of another springtime downpour. This one is expected to wreak havoc (50-90 millimeters of rain through Saturday) just as many storms have in the recent past. The city of Toronto is warning that a major commuting artery, the Don Valley Parkway, may be shutdown due to overflow from the adjacent Don River. A very familiar scene to Torontonians (click here for carnage). While the city braces for impact, many residents are left wondering how to prepare for the damage. The short answer, they can’t.
Flood insurance is a new concept in Canada. It has only become available recently after a major flood event in Calgary. Being such a new product, it is safe to assume that most Canadians won’t have an overland flood insurance policy in place this weekend. In short, overland flood insurance covers damage from water flowing above ground into buildings and residences. Until 2013, private overland flood insurance has not been offered in Canada for a variety of reasons (Sandrik, Kovacs, Oulahen, & McGillivray, 2010). The most logical reason being that floods are predictable and thus not included in the typical “act of god” clause in insurance policies that insure homeowners against lightning, windstorms, and hail. Floods are predictable in the sense that you must live near a flood plain to experience flooding. This is deemed an uninsurable risk by private insurance companies because individuals accept the risk of flooding when they choose the location of their house. The increasing frequency of extreme weather events has complicated this logic; houses that were previously deemed to have little or no risk of flood damage have experienced flood damage.
Climate change and changes in extreme weather events have played a large role in changing the dynamics of flooding. Flood events are characterized by their recurrence interval in which the probability of an event of a magnitude is expressed in years. A 100 year storm has a probability of 1 in 100 or 1% probability of occurring in any given year. Climate change has altered the recurrence interval of storms meaning a storm that was previously deemed a 100 year storm now has a greater than 1% probability of occurring which has caused more damage to a wider area. There is evidence of this damage all over Canada including two recent high profile floods in Calgary and Toronto (Bascaramurty, Nelson, Cryderman, & Stueck, 2013).
Providing private overland flood insurance faces some classic economic issues, known as market failures. Both moral hazard and adverse selection are issues in this market for insurance and arise from asymmetric information. The moral hazard problem, where individuals who have insurance increase the risk of their behaviour, increases the overall risk of the insurance pool. It is easy to think of reasons why moral hazard would plague this market for insurance. Those who choose to live on or near a flood plain are the much more likely to seek out overland flood insurance. Due to their behaviour of building homes on risky land, they have increased the overall risk in the theoretical flood insurance pool. The adverse selection problem is particularly relevant in the climate change debate. The adverse selection problem where one party has more information than the other about the riskiness of the insurance, is an issue because the increased frequency of extreme weather events increases the risk of flooding. Homes that previously were not at risk of flooding and were deemed insurable may now be at risk of flooding due to the increased frequency of extreme weather events.
When there is presence of market failure, particularly in the insurance market, governments can provide insurance instead of private firms. Governments in the United States, France and the UK have taken this approach to offer more adequate coverage and reduce some of the liability to insurance companies (Sandrik, Kovacs, Oulahen, & McGillivray, 2010). The Canadian approach has been disaster relief funding at both the federal and provincial level. The current federal Disaster Financial Assistance Arrangements (DFAA) program designates a cost sharing between the federal government and provincial or territorial government after a natural disaster. Canadians who don’t have flood insurance in place can apply for relief under the DFAA. It’s important to note that there is a cap on the amount of damage covered and its is unlikely that 100 per cent of damages will be covered.
As Torontonians prepare to rescue their abandoned cars and pump water out of their basements they may begin to question whether insurance, whether public or private, really is the answer to their problems. The City of Toronto is investing in projects all over the city in the hopes of reducing basement flooding. The goal is to alleviate this problem for residents of Toronto thereby reducing the need for flood insurance. Raindrop Plaza, a new park developed by Toronto Water and Green Streets TO, is being designed specifically to store and channel rain water helping to eliminate basement flooding in the area. While the insurance industry has largely failed to provide adequate solutions to deal with flood damage, let’s hope Canadian municipalities continue to elevate projects the reduce the need for flood insurance.
Bascaramurty, D., Nelson, J., Cryderman, K., & Stueck, W. (2013, July 29). Governments ponder how to weather the next big storm. Retrieved from The Globe and Mail: http://www.theglobeandmail.com/news/national/weathering-the-next-one/article13331404/?page=all
Government of Canada. (2015, 12 16). Disaster Financial Assistance. Retrieved from Public Safety Canada: https://www.publicsafety.gc.ca/cnt/mrgnc-mngmnt/rcvr-dsstrs/dsstr-fnncl-ssstnc-rrngmnts/index-eng.aspx#a04
Sandrik, D., Kovacs, P., Oulahen, G., & McGillivray, G. (2010). Making Flood Insurable for Canadian Homeowners: A Discussion Paper. Institute for Catastrophic Loss Reduction & Swiss Reinsurance Company Ltd.