As Hurricane Irma barrelled toward the Florida coast on Friday, the toll of the damage was already staggering.
In the past two weeks, deadly hurricanes have unloaded trillions of gallons of water on the Southern U.S. and the Caribbean. Economic loss estimates now range well above $100-billion. And two more storms in Irma's wake threaten to wreak still more havoc and set records for rebuilding costs.
The devastation casts a lens on the global insurance industry's struggle to keep pace with climate change – and highlights the biggest threat to Canadians' homes: water damage.
Within the past decade, water-related disasters have begun to overtake fire as the most costly source of claims in the Canadian property and casualty (P&C) insurance industry – a reversal of the historical norm. This trend was punctuated by floods in Southern Alberta and Toronto in 2013 that caused billions of dollars in insured and economic losses. While wildfires in Fort McMurray and British Columbia have proven that combustion is still a serious concern, it's water for which the insurance industry – and most homeowners – are least prepared. Nine of the 13 natural catastrophes recorded in Canada so far in 2017 have included water damage or flooding, resulting in hundreds of millions of dollars of claims.
While payments for appliance overflows and sewage backup have soared in recent years, most homeowners don't have insurance for damages caused by so-called overland flooding – water from rivers, dams and rain that seeps into homes through basements, doors and windows. This type of insurance has only become available in the past couple of years and Canadians have been slow to buy coverage.
"After the Calgary floods, the insurance industry realized that it wasn't structured around flood the way Canadians expected it to be," said Craig Stewart, vice-president of federal affairs at the Insurance Bureau of Canada. "We believe we're in about a 10-year transition period."
This represents a major business opportunity for insurers. But the effort has already faced challenges, with consumer demand for protection unclear and the products threatening to add a layer of opacity over who would be eligible for government-funded disaster relief when the next Big One comes.
One year ago, there were just four insurers in the market offering overland flood insurance. Now, there are 15 and that number is growing. About 25 per cent of Canadians have purchased some kind of coverage, as of the IBC's last assessment. But the design of the products varies greatly in terms of price and coverage limits.
That contrasts against commercial insurance, where policies typically offer some protection against flooding and other water damage. Toronto-based Fairfax Financial Holdings Ltd. is one of the Canadian companies exposed to losses as a result of the carnage caused by the U.S. hurricanes through its insurance and reinsurance operations. Claims from Hurricane Harvey alone could reach $250-million, Paul Holden, an analyst with CIBC World Markets, said in a note to clients. Those losses "can be easily absorbed, but the intensity and path of Hurricane Irma have the potential to turn into a significantly more severe event," Mr. Holden said, adding that if Irma makes landfall in Miami as a hurricane, insured losses could range from $50-billion to $60-billion for global insurers. In a worst-case scenario, that number could reach $125-billion.
But for homeowners, there's an increasing uncertainty over where insurers' responsibilities end and where government disaster relief begins.
The federal government currently funnels financial assistance to provincial and territorial governments through the Disaster Financial Assistance Arrangements (DFAA). Each province has its own criteria for claiming relief funds, but most say that if a consumer could reasonably have bought insurance, then they would not be candidates for disaster relief. As overland water insurance rolls into the market, more people will technically become ineligible for aid.
"It's messy because you want the right market signals to be in place to encourage consumers to protect themselves. You don't want people to necessarily be sitting back thinking, 'The government's going to bail me out,'" Mr. Stewart said. But consumers might not be aware of what's available and "that's, frankly, probably not fair," he said.
In November, the insurance industry will meet with Public Safety Minister Ralph Goodale as well as think tanks, researchers and the provinces to try to find common ground and discuss what to do about the 10 per cent of properties in Canada where premiums would not be affordable because the chance of flooding in any given year is too high.
"What's important is, if you have the choice and you could have insured it, that you have no access to the DFAA any more. Because that's like morphine. Once you've had it, you don't want to let go," said Philipp Wassenberg, CEO of global re-insurer Munich Re's Canadian operations. "There needs to be this taking away of the promise of the DFAA at the same time as the offering raises."
And when disaster does inevitably strike, insurers are opening their books to more losses. Greg Somerville, head of Aviva Canada, said that climate change has put pressure on his business.
"We've had relentless water challenges across Canada since the early part of the year. It's shaping up to be a challenging year given the impact of weather-related losses," he said in a recent interview. Aviva was among the first to bring flood insurance product to market 18 months ago.
Canadian insurers say that flood maps should be improved to allow for better underwriting and that consumers need more education. "People won't buy insurance if they don't feel they are at risk," Mr. Stewart said. "They need to know if they're at risk."