Ottawa urged to consider national flooding insurance plan as costs soar

Canada should move away from its cost-sharing disaster funding program, says a fresh report, because the status quo is disincentivizing municipalities, developers and homeowners from risky behaviours. That should lead to Ottawa moving quickly to adopt a national flood insurance regime.

Released last week by Emergency Preparedness Minister Bill Blair, the report draws on work from the government’s task force on flood insurance and relocation, and recommends, among other things, that Ottawa create a mandatory public flood insurance system.

Blair is tasked with ushering in a “low-cost” flood insurance program to offer protection to uninsured homes in high-risk areas, with his mandate letter also calling for the creation of a portal on flood risks and suggestions on how to protect communities.

According to the report, flooding across Canadian homes costs $2.9 billion a year, a figure expected to rise in the face of more frequent and expensive disasters.

It’s not just homes on coastlines. The report notes Canada’s major cities of Toronto, Montreal and Vancouver have “substantial exposure to flood risks,” which is “compounded by the trend” of homes with finished basements.

Between 2013 and 2017 alone, disaster losses sat at $16.4 billion. Before 2009, insured losses sat at an average of $400 million per year, a number that’s since jumped to $1.4 billion.

To tackle the issue, Ottawa relies largely on its cost-sharing program, the Disaster Financial Assistance Arrangements (DFAA). Since its creation in 1970, the program has doled out $6 billion to provinces and territories — with more than 60 per cent of that flowing in the last decade.

The DFAA reimburses premiers for eligible costs, and premiers design and administer the aid for people, small businesses and local governments.

The document rips into the current playing field, declaring that federal, provincial and territorial help for disasters creates a “moral hazard” for Canadians.

That’s because homeowners have little incentive to curb flooding risk or buy insurance (less that 60 per cent of Canadian homeowners currently have flood insurance, the authors say), and cities approve land-use decisions that can contribute to new risks — while raking in money for new development. Still, all three levels of government bear most of the public costs to recover and rebuild after flooding.

The report comes as Canada braces for rising immigration levels, which experts have noted could exacerbate the housing crunch.

Jason Thistlethwaite, a professor at the University of Waterloo who studies ways to curb the economic impacts of extreme weather, said the layering of those crises on top of climate change means governments are under pressure to find “suitable locations for future development.”

Setting up a national flood program would signal that municipalities and developers ought to “know better” when pursuing housing projects in areas at risk of flooding, he added.

The document endorses two flood insurance models for Blair to consider, ranking them the strongest among four approaches considered: the public insurer and public reinsurer.

Under the former, a Crown corp underwrites insurance from the industry as an “intermediary, with an automatic government backstop.” That would allow it to make the purchase of insurance mandatory.

The corp charges a fee for private players to collect premiums, pay claims and develop policies on its behalf, and the model is “more likely to be standardized” for Canadians, the report adds.

The latter takes a more “layered” approach by letting homeowners first choose if they want to buy insurance from a private seller, which must cover up to $25,000 of risk. Then, people are ordered to buy flood insurance above this limit up to a high of $300,000 from the industry.

A Crown corp sells any extra loss to private insurers and reimburses them for losses covered under the second step. A government backstop kicks in, though the approach is less likely to be standardized, the report says.

Still, it can incentivize homeowners to take stronger mitigation measures, or consider moving or self-insuring from the get-go, especially those living in high-risk areas prone to flooding.

Slobodan Simonovic, an engineering professor at the University of Western Ontario studying flooding and risk reduction, said insurance should not be seen as an “isolated” measure in dealing with disasters.

Generally, Canada takes a “reactive” and “bottom-up” approach in responding to weather-related incidents, though the last several years have shown why the “building back better” mantra is direly needed by governments and individuals. The existing approach is not “efficient” as it requires multiple layers of sign-off, leading to a web of bureaucracy during a time of emergency.

The document also sends a signal to politicians they need to consider a “strategic retreat” from building structures in already concentrated areas, which will only increase future costs and damage, he warned.

Commending the report’s findings, Thistlethwaite cautioned that flood insurance is not a tool “designed to deal with inequities,” rather a “risk-transfer mechanism.”

That means leaders should recognize the limitations of the tool, and the need to layer it with other measures — be it social or income support, the need for more resilient infrastructure, better risk maps, or developers and cities re-evaluating where they build new homes.

Thistlethwaite said the government should fold in equity considerations into whichever model it chooses, as that is the “missing piece of the puzzle in a comprehensive risk analysis in Canada.”

The government needs better research on the “vulnerability” of certain populations, especially people who can’t “absorb” climate risks.

A public model of flood insurance would be “better suited toward managing some of the equity considerations,” said Thistlethwaite, as it will let officials use tax or mortgage data to tailor their approach.

The report references a 2007 study the department commissioned from the Canadian Red Cross that found seniors, Indigenous people, lower-income Canadians, children and immigrants are among the most at risk of experiencing loss because of disasters.

Reading between the lines, Thistlethwaite said the fact Ottawa published its analysis shows officials could lean toward certain “preferences” outlined in the public insurer and public reinsurer models. “We now have the research and data. It’s time to enter into the machinations of the political side,” he added.

Emily Harris, director of The Policy Shop, a consultancy firm that helps municipalities with policy and revenue development, wondered which cities were consulted to draft the report.

Provinces are “in no way … appropriate [spokespeople] for locally elected government,” or communities hit by floods, she said in a note to Parliament Today.

While the document acknowledges municipalities are on the front lines of flood risk management in the country, it notes that under the federal framework, they are “highly dependent” on other governments for funding in such cases. Though the report says it consulted with municipalities, a detailed annex only lists federal, provincial, territorial and industry stakeholders. (Harris was once a financial analyst in the City of Toronto’s budget division.)

In a statement issued last week, Blair said the report is a “first step” toward stronger flood risk reduction, and Ottawa is reviewing the findings. He noted it comes as Environment Minister Steven Guilbeault looks to launch the country’s inaugural national adaptation strategy by the end of this year, which is expected to also focus on resilience to flooding.

The Insurance Bureau of Canada’s Craig Stewart, vice-president of climate change and federal issues, said claims from extreme severe weather have quadrupled in the last 15 years. He added Ottawa has shown “essential leadership” in naming the task force and insurers are “eager” to implement a national insurance program “delivered through public-private partnership.”