Climate change is upending the house insurance industry. And it is going to cost you

If you spend a while talking to Blair Feltmate, head of the Intact Focus on Climate Adaptation in the University of Waterloo, you'll hear him create a lot of references to “the file.”

Insurance Bureau of Canada? “They be aware of file very well.”

Property and casualty insurers? “They're around the file.”

Canada's ministries of finance? Feltmate is trying to “put the file on their own radar screens.”

Like a dossier being passed around from industry to industry, the “file” Feltmate is talking about is global warming adaptation. And following recent news that Canada is warming at twice the speed of the world, extreme weather risks are now staring the house insurance industry square in the face.

When the insurance industry looks at extreme weather events, it's often when it comes to dollars. Between 1983 and 2008, catastrophic loss claims (meaning any claim leading to over $25 million price of damage) averaged $405 million per year. From 2009 to 2021 (inclusive), catastrophic losses cost insurers typically $1.8 billion annually, based on the Insurance Bureau of Canada.

“What's happening with the weather conditions are crazy,” says Daniel Mirkovic, President and CEO of Square One Insurance. “A lot of things that are happening now we never might have expected.”

The insurance industry is taking climate change seriously. TD Insurance recently announced the creation of an Advisory Board on Climate Change – a seven-person team made up of engineers as well as professors from five Canadian universities which have been conducting research with respect to the impact of global warming and severe weather. And Intact announced on April 25 it's donating $2.3 million to 16 charitable partners like WWF-Canada that are exploring real solutions for managing climate change.

Insurers care about global warming not because they have big hearts, but simply because they know they'll bear the brunt of its financial devastation.

So what, exactly, are we headed toward, and how are insurers going to pay for it?

Canada's greatest risks

When people ask Feltmate if Canada is headed within the right direction with regards to adjusting to climate change, he tells them yes, but includes this metaphorical caveat:

“You could be inside a little compact car taking the highway inside a certain direction,” he states. “If you appear within the rearview mirror and see a great big tractor trailer coming down right directly behind you at twice your speed, you pointed in the same direction isn't good enough. You've gotta accelerate. And right now the tractor trailer is global warming and extreme weather risk.”

The main threat to Canadian homes as a result of global warming is, as Feltmate loves to place it, “too much water within the wrong place.” He's talking about flooding – residential basement flooding, particularly.

Water-related losses taken into account more than 50% from the increase in catastrophic insurance payouts. We are able to blame climate change for flooding but we also have to check out losing natural infrastructure: wetlands, forests, fields, and marshes. “These are places where water has historically gone and absorbed and discharged slowly,” says Feltmate. “We've either paved them over or we've turned them into agricultural land.”

What's happening with the climate is crazy. Several things that are happening now we never might have expected

Either way, both of them are human-driven issues.

On average, having to replace a flooded basement costs $43,000, according to the Insurance Bureau of Canada. But a flooded basement can affect more than finances; it's psycho-social repercussions, too. The Intact Centre reported that after the 2021 Montreal floods, where 200 households were affected by flooding, almost 70% of individuals reported suffering from anxiety, sleep disturbances or problems concentrating.

“So this is also now an issue for life and health insurers,” says Feltmate. “We're documenting elevations in prescription medications, which are life and health insurance coverage, to handle the stress related to flooding that individuals experience.

“The person with average skills which has a flooded basement misses 7.1 days from work, also is a claimable problem for life and health insurers (lost time from work) and that's to cope with contractors and individuals you have to repair your house.”

Next around the threat list is fire, which Alberta-based FireSmart Canada has aimed to deal with since 2008. Now a national program, FireSmart includes strategies for communities and homeowners on how to control wildfires. Things like removing vegetation around forest-surrounded cities (dead zones) so that there is a decreased chance wildfires have almost anything to feed off of as they approach communities; using fireproof siding, shingles, and cladding; removing any shrubbery throughout the house, and never storing wood outside it.

Feltmate says some home insurers will even give discounts if homeowners have several these measures in place. The issue is, the FireSmart program isn't mandatory. It's just a lot of recommendations. Area of the Intact Centre's goal would be to turn those recommendations into formalized standards.

Changing policies and rising premiums

If now that we know more unpredictable and extreme weather is already happening and will still happen, would it not seem sensible for insurers to begin including perils like overland and coastal flooding – that are more often than not available only as endorsements – within their base policies? Well, not if you are attempting to operate a business.

In fact, Mirkovic says he's actually seeing insurance companies doing the alternative. “Providers seem to be pulling stuff out of their comprehensive policy and which makes it a choice,” he states, referring to things like coverage for sewer backup, hail, wind, and inland flooding.

“A lot of these companies say 'we're not likely to offer that like a base policy anymore because we have to charge different prices based on the risk, or we want to limit our exposure by introducing sub-limits or deductibles.” The onus, then, will increasingly be on homeowners to decide what coverage they need to protect from extreme weather events.

So, is that this the home insurance industry trying to capitalize on climate change? Mirkovic and Feltmate refuse. It's merely evidence of a struggling industry making every effort it can to remain afloat.

There's that stating that the only real some things in everyday life are taxes and death. I'd probably add rising insurance premiums as a third

“If you had been to inquire about most property insurance companies in The united states if property insurance is profitable on their behalf, most are going to say it's not,” says Mirkovic. “They spend lots of their time on car insurance. There are other cars on the roads than homes in the streets, and the premiums for car insurance tend to be higher.”

So home insurance companies have to be mindful the way they approach coverage for perils that'll be exacerbated by climate change. “No home insurance company really wants to subjected to a 20% price increase,” says Mirkovic. “That disrupts their customer base, plus they know that will cause people to shop. Then when they're putting through a 20% increase, it is out of desperation. The, and individual companies, are attempting to arrive at the place where insurance goes up at the expense of inflation. But that was not happening within the last number of years because global warming is driving more losses than in the rate of inflation.”

The home insurance market is in a small tough spot, then: more extreme weather means more frequent and costly claims, meaning premiums have to rise as well. But insurers also can't afford to drive away all their business, either. We're already seeing an increase in property insurance premiums because of climate change and it's showing no indications of stopping.

“There's that stating that the only real some things in life are taxes and death,” says Mirkovic. “I'd probably add rising insurance premiums as a third.”

The price of climate change

A big part of Feltmate's job involves attempting to convince powerful people who global warming is not only an environmental concern – it's an economic threat, too.

He has no trouble getting the insurance industry aboard with this concept. “They're probably the most motivated because they know risk much better than anybody,” he says. “It's their business.”

With ministers of finance, it will help to start by highlighting the growing uninsurability of Canadian homes. Earlier this January, the Intact Centre released a report that indicated Canadian homes aren't prepared for catastrophic events. In fact, some 1.7 million homes are in chance of the kinds of flooding that aren't included in standard property insurance coverage.

Feltmate's been warning about uninsurability since at least 2021. Lately, he's been working on relaying that message to federal finance minister, Bill Morneau, and Ontario's Finance Minister, Vic Fedeli.

The feeling of banks is that many people will get through the first round without being insured for flooding, by making money mutual funds or applying rich relatives or whatever it may be – but probably not two

He's focussed on showing them how an increasingly uninsurable housing industry will in the end hurt the mortgage market. Having to pay up front for water-related damages – or any home repair for that matter – could effectively bankrupt people, raising the likelihood of loan payment defaults, and hurting the mortgage market as a result.

“Right now we're tracking about 25 cities in Canada which have experienced a lot of flooding, where insurance has been pulled back or perhaps is oftentimes non-existent,” says Feltmate, who, regularly, receives calls from mayors across the nation because a growing quantity of their constituents can't get insurance coverage. These mayors aren't calling from remote communities, either. Feltmate says there are lots of places in Toronto, for instance, where those who own multi-million dollar homes can't even get insurance coverage, either due to making too many flooding claims themselves or living in a neighbourhood considered high-risk because of a good amount of claims.

“As the following big storms hit, we're trying to find out if we see spikes within the per capita mortgage defaults in those communities, given that they no more have insurance coverage.”

You'd think this could concern mortgage lenders, such as the big banks, who, as personal finance columnist Rob Carrick has put it, “live off mortgage lending.” But Feltmate says that isn't the situation.

“The banks happen to be pretty much asleep at the turn on this file until now,” he states. “Until they really begin to see on the large scale people defaulting on mortgages, they don't believe something's material.”

“The sense of banks is the fact that some people will get through the first round without insurance for flooding, by cashing in mutual funds or drawing on rich relatives or whatever it may be – but most likely not two.”

“Taking the danger out of the system”

Feltmate can talk about the problems coming our way all day, but his team also offers to pitch solutions.

“Up until about 2 or 3 years back, 95% from the discussion about global warming in Canada was focussed on mitigating greenhouse gas emissions and lowering our carbon footprint,” says Feltmate. “All of which is okay. But there was virtually nothing on adaptation and extreme weather risk, which is on the ground now and is going to get a lot worse moving forward.”

A major initiative that Feltmate's team is spearheading is really a flood-risk mitigation arrange for homeowners called the Home Flood Protection Program (HFPP), a homeowners outreach program that shines the spotlight on which can be done at the individual household level, with a little the aid of the federal government. Being proposed is really a government subsidy for homeowners to make sure changes for their home that will help minimize the damage caused by flooding.

That includes such things as disconnecting the downspout in the eavestrough and redirecting it with an extension three metres from the first step toward the house. Or putting plastic covers over the window wells to ensure that when the water hits the windows at ground level, it doesn't fill your window well and flow into the basement. And installing a second sump pump with an extension that directs water away from the foundation, as well as a backup battery supply for the pump(s) should the power is out.

“With some subsidy from the government, coupled with an incentive from retailers like Canadian Tire and residential Hardware, and also the homeowner placing a little bit of dough on the table themselves,” says Feltmate, “we can put those measures in position for about $250 per house.”

Feltmate is careful to point out, however, that “none of this is flood prevention. This is flood protection. If Noah's flood hits, a house can still be flooded. But there exists a very doable solution to take risk out of the system in accordance with basement flooding that's inexpensive to executive on, technically not challenging, and the political capital is astronomically high.”

The expectation – or even the hope, rather – is the fact that other provinces follows around the heels of Ontario in implementing a flood-protection plan.

“The remaining provinces will have to seriously board,” says Feltmate. “You can't have somebody owning a home in Ontario or Alberta that's flood-protected after which out of the blue Manitoba or Saskatchewan say well we aren't going to do this for the people. That isn't going to fly.”

Educate and motivate

So, where will we go from here?

Well, there's lots of try to do. Surprisingly, the hard part isn't in creating a viable solution; it's getting people to adopt it.

“The technical part isn't the limitation,” says Feltmate. “It's motivating people and/or organizations to act. Whether that's federal, provincial or municipal governments, real estate associations, insurance brokers, banks – it's motivating action.”

On the main topic of flood-protection, which remains our biggest threat, the Intact Centre is launching practicing the insurance coverage Brokers Association of Canada (IBAC), home inspectors and realtors. IBAC, addressing some 38,000 insurance brokers, will be able to earn professional credit for completing Intact Centre's five-module course (Fifteen minutes for every course) on climate change and extreme weather risk and basement flood risk, which is likely to debut soon. Anticipation is the fact that brokers, home inspectors and real estate agents will be able to confidently explain to their clients some of the vulnerabilities of the house and measures they are able to take around their house as well as in the basement in order to protect from flood damage before it's too late.

“People still believe, I think very wrongly so, that we have the posh of time on this file,” says Feltmate. “Which we do not.”