Towards waterproof insurance?

Insurers don’t like water. In Canada, a basic home insurance contract excludes floods, sewer backups and water infiltration. Regarding sewer backups or surface water infiltration caused by excessive rain or a blockage of drainage, they offer additional protections (called endorsements) while limiting the amount that can be claimed.

For the floods, it is something else. According to the Insurance Bureau of Canada, 19% of the Canadian population lives in a flood zone, 20% in Quebec. This translates to 1.7 million properties in the country (17.8% of the total), including 340,000 in Quebec (15.7%). Being prone to flooding, these properties were uninsurable. But with improved knowledge of hydrology, insurers are now able to assess the real threat, so since 2017 some of these properties are insurable — in whole or in part, depending on the level of risk. However, there is still no flood insurance available for 5% of properties, those located in high-risk areas (where flooding is not only probable, but certain over a 20-year horizon).

Are these owners victims of an injustice? Admittedly, a flood can cause very serious damage, but unlike a fire or a tornado, this type of disaster is perfectly predictable. Hydrologists know exactly where flooding can occur, how often, with what effect, and in what manner — that is, from bottom to top, and near a watercourse.

Mathematically, nothing would prevent an insurer from covering this risk for the 5% of properties with a high probability. Take a $300,000 house built in an area with a 20-year flood recurrence rating. The flood endorsement would cost $15,000 per year ($300,000 divided by 20), an exorbitant sum!

Insurers get wet

Since 2017, a dozen insurers have offered Quebecers a flood endorsement. At Desjardins, for example, this endorsement is free for low-risk properties, that is, where a flood could occur once every 100 years, or less. But it costs from 15 to 120 dollars per year when the risk is moderate – that is to say “probable without being a certainty”, in other words with a recurrence index of 20 to 100 years. The price depends on the value of the property and the amount you want to cover.

For the 5% of properties located in high-risk areas (recurrence index of 20 years or less), the Quebec government has a general compensation and financial assistance program. It also supplements the limits of endorsements from private insurers. In the first version of the program, it was possible to claim the maximum at each flood. But following severe flooding in 2017, the government reformed its system to hold homeowners accountable and encourage their resettlement away from floodplains.

As of 2019, it imposes a lifetime cap of $210,000 on claims for a single-family home, regardless of property value. When the damage reaches either 50% of the replacement value of the residence or $100,000, whichever comes first, the government then offers three options: a severance allowance, moving the residence or financial assistance to the immunization (raising windows, removing the electrical system from the basement, even building embankments under certain conditions). The owner who refuses these options will still be entitled to compensation, but his property will then become ineligible for the program… and difficult to resell.

Who would have “believed” her

According to the Insurance Bureau of Canada, the total value of flood payouts has quadrupled in 20 years and accounts for three-quarters of all disaster payouts. Blame it on global warming? In fact, first to urban sprawl and the colonization of the banks. This is why all government plans now encourage residents to move.

The federal government does not have a direct compensation program: rather it supports provincial programs through the Disaster Financial Assistance Arrangements. In 2020, he established a Flood Insurance and Resettlement Task Force, which brings together insurers, experts and provincial government officials to create affordable flood insurance that incentivizes travel out of flood-prone areas.

The working group, which is due to submit its report at the end of April 2022, will recommend forming a “national pool”, where insurers would pool this type of policyholder, in order to spread the risk (the logic being that it catastrophic floods rarely occur everywhere at the same time). The federal money would be used primarily to relocate properties away from flood zones, but also to guarantee the solvency of the “pool” in the event that the total claims exceed the sum of the policyholders’ premiums.

The regulatory debate will focus on three main points. First, what should be the amount of an “affordable” premium? If the price of this insurance is too low, the federal government will often have to make up the shortfall. But a more realistic amount, $1,000 or $2,000 a year, would double or even triple the cost of home insurance.

Which brings up the second point: should this insurance be imposed on all owners of homes in a flood zone? Unlike mandatory auto insurance, home insurance is generally voluntary in Canada for both renters and landlords (unless required by a mortgage lender or landlord). Compulsory flood insurance would have the merit of spreading the risk more widely and therefore reducing premiums, while signaling more clearly to owners and tenants the threat hanging over them.

One solution lies in large-scale mitigation measures, by building housing adapted to flood-prone areas or by carrying out civil engineering works such as dykes, diversion channels, retention basins. This raises the third question, which will be hotly debated: what mitigation measures will be considered acceptable by insurers, under what conditions and under whose responsibility? As shown by the catastrophic overflow of Sainte-Marthe-sur-le-Lac in 2019, where 2,500 houses were engulfed in 45 minutes following a dike failure, it is possible to live below the level water part of the year, provided the dyke is maintained!

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