Opinion: Disaster costs are overwhelming private insurance. We need a national public insurer

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Opinion: Disaster costs are overwhelming private insurance. We need a national public insurer
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A firefighter protects a beach front property while fighting the Palisades Fire on Jan. 9 in Malibu, Calif.Jae C. Hong/The Associated Press

Claude Lavoie is a contributing columnist for The Globe and Mail. He was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023.

The devastating wildfires around Los Angeles have caused more than US$100-billion in damages based on some estimates. These losses and increases in the scale and frequency of severe weather damage from hurricanes, tornadoes, flooding and forest fires will lead more insurers to pull back. Companies such as State Farm, California’s largest insurance provider, discontinued fire coverage last year, leaving many homeowners in devastated regions uninsured. Similarly, only 2 per cent of the costs of the destruction from Hurricane Helene were insured.

This is a problem in Canada, too. The insured losses from flooding and forest fires in the summer of 2024 amounted to more than $7-billion and insurance companies are reluctant to offer coverage to some Canadian households living in high flood risk areas. With natural disasters becoming more frequent, the difficulty in getting affordable insurance in the country will expand.

This is because only high-risk property owners, such as those living on or close to a floodplain or at-risk forest, are really incentivized to insure. This limits the insurance company’s ability to pool the risk and forces them to charge high premiums that are too expensive for many homeowners.

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Given this insurance gap, governments – and thus taxpayers – often end up covering the losses with the province offering compensation to households and passing on a big part of the bill to the federal government through the Disaster Financial Assistance Arrangements program.

Having taxpayers foot the bill is unfair. Why should taxpayers living far from any body of water cover the losses of rich homeowners who bought prime real estate by a river or the sea, likely with full knowledge of the flood risks? With the government footing the bill, these at-risk homeowners also have no incentive to buy insurance or take action to mitigate climate-related risks.

And leaving many devastated households without financial support is not politically palatable.

How can we address that?

In some countries, for example the U.K., the government subsidizes the premium charged by private insurers for flood risk to keep insurance affordable and increase uptake. This is also one of the proposals of Canada’s Task Force on Flood Insurance and Relocation. However, this is not equitable as it still means all taxpayers subsidize particular property owners. Subsidies also diminish homeowners’ incentive to reduce risks.

A better solution may be to introduce a mandatory insurance plan that covers damages for any natural disaster. Forcing homeowners to take on multi-peril insurance coverage pools the risks across all households and types of liabilities and leads to more affordable premiums – albeit subsidies may still be needed for some high-risk households. Since everybody in Canada faces some sort of natural disaster risk, it would be fairer than a non-mandatory single-risk insurance plan.

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This would likely require the creation of a national public insurer, as many private insurers may not be willing or able to bear the risks associated with a multi-peril insurance scheme, especially if they cannot turn down households from enrolling. The level of losses could be high enough to implode the private insurance market. Think about the hefty payouts in the event of an earthquake in the Vancouver region, possibly followed by flooding from an earthquake-related tsunami.

A national public insurer could operate similar to, or within, the Canada Housing and Mortgage Corporation. All households (with some exceptions) would have to buy multi-peril insurance. An income-based subsidy could be applied to already-built homes to increase affordability, which would be fairer than subsidizing the premium. Premiums could also be lowered for households or municipalities who have demonstrated action to mitigate the risks and impacts of weather-related events.

Giving the increasing certainty of future weather-related disasters, the expected public liability, such as destruction of public infrastructure, should also be recognized in the public debt number, as pensions and some Indigenous claims currently are. This would encourage governments to put money aside or issue catastrophe bonds, as many countries do, to fund these future costs.

The costs of extreme weather are only getting worse. Good financial planning and adaptation measures are critical to improve our resilience and quality of response. The government needs to think ahead and act on this. The current task force on flood insurance has been given too narrow a focus and is moving too slowly to support our current reality.

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