Insurance and Risk Management Services for Managing Climate Change Risk. Financing a Clean Energy Growth Economy

Transcription

1 Insurance and Risk Management Services for Managing Climate Change Risk. INSIGHT BRIEFING JANUARY 2019

2 INSURANCE AND RISK MANAGEMENT SERVICES FOR MANAGING CLIMATE CHANGE RISK This is the third briefing in a series on how the transition to a clean energy growth economy with lower greenhouse gas emissions will be financed. Financing these pathways forward is a foundational activity and core interest of the Centre for a Clean Energy Growth Economy.

3 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. The Conference Board of Canada Insurance and Risk Management Services for Managing Climate Change Risk Introduction Climate change is amplifying risk to property, businesses, and infrastructure. 1 Extreme weather events are occurring more frequently. Weather-related insurance claims for floods, forest fires, and other catastrophic events have increased correspondingly. According to the OECD, annual losses from overland flooding have grown to over US$40 billion annually in recent years; more flood events occurred in than in the whole decade of the 1980s. 2 This series of briefings on financing the transition to a clean energy growth economy is intended to provide analysis and focus on the outcome i.e., emissions reduction. Significant societal and economic transitions, such as responding to climate change, can have a variety of implications. Through this series of briefings and other research, The Conference Board of Canada is focused on providing evidence to inform the transition pathway to a clean energy growth economy. According to the Insurance Bureau of Canada, 3 Canadian insurers are now facing claims on natural catastrophes (floods, forest fires, and other extreme weather events) of approximately $1 billion annually up from $400 million annually in earlier decades. These claims are expected to continue to rise, along with the severity of the impacts of climate change on personal property and public assets. This aggregate number does not include smaller events that are not considered catastrophic (i.e., an event with total claims less than $25 million), so the aggregate impact of climate change on Canadian insurers is likely understated. 1 Some of this material has previously appeared as opinion pieces in The Globe and Mail. 2 Organisation for Economic Co-operation and Development, Financial Management of Flood Risk, Insurance Bureau of Canada, Media Centre. 1

4 INSURANCE AND RISK MANAGEMENT SERVICES FOR MANAGING CLIMATE CHANGE RISK Similarly, there has been a related dramatic rise in government funding and liabilities due to flood damage and other catastrophic events. Annual liabilities of the Disaster Financial Assistance Arrangements (DFAA), managed by the federal and provincial governments, have risen from around $100 million annually two decades ago, to $500 million in , to a current high of $2 billion in The Parliamentary Budget Office recently projected that annual DFAA liabilities would average $902 million over five years, of which $673 million would be for floods. 4 Based on recent repeated widescale flood experience, those estimates may prove to be conservative. It is reasonable to expect Canadian governments to aspire to best-in-class practice for managing disasters, including those related to climate change. Future government spending on flood relief and recovery could be contained through concerted action on a combination of factors. These include: better land use planning in communities; strengthened public investment in flood mitigation; expanded private insurance coverage; the development of risk-sharing with the private sector on insurance coverage for high-risk properties. A public-private risk-sharing partnership that draws on the strengths of all parties (as has been developed in the UK) would improve Canadian flood risk management overall, while also strengthening incentives for property owners to mitigate their own specific flood risks. Indeed, a national conversation on improved flood management has begun among Canadian governments, the insurance industry, academics and think tanks, and other stakeholders. This conversation is an important step. More analysis, discussion, concrete decisions, and action will be required if Canada is to reduce the risks and improve the management of flooding. 4 Projections are from the Parliamentary Budget Office (PBO), Estimate of the Average Annual Cost for Disaster Financial Assistance Arrangements. 2

5 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. The Conference Board of Canada Improving private sector flood insurance coverage across Canada would help to share flood risk across many insured parties. 3

6 INSURANCE AND RISK MANAGEMENT SERVICES FOR MANAGING CLIMATE CHANGE RISK Specific Insurance Products In which specific ways can insurers help manage risks related to climate change and underpin the transition to a clean growth economy? We explore the following three ways: 1. Overland Flood Insurance Improving access for consumers and businesses to private sector insurance coverage, combined with the appropriate use of government risk management and funding capacity, would help to share and manage the growing risk of more extreme weather events related to climate change. The Canadian insurance and risk management market has seen important recent innovations in the availability of other climate change-related products. Better information on flood risk, such as improvements in flood risk mapping technology, is leading to improved risk management capacity within the industry. The result is expanding the availability of flood insurance coverage for homeowners and businesses in Canada even as the risk and severity of flooding is increasing. There are trade-offs between availability and affordability of coverage, and some high-risk properties may be very expensive to cover. But, overall, advances in the Canadian flood insurance market mean that flood risk is being gradually shifted away from taxpayers to insured parties and the insurance industry. This is still a promising market for insurers, which have only begun to offer flood coverage in Canada since As the market develops, there appear to be pronounced differences in available flood coverage among provinces. A recent unpublished survey by IBC shows that Ontario has the most active flood insurance market, with 12 insurers representing 53 per cent of the market currently offering overland flood coverage. 5 At the other end of the spectrum, Quebec has the least active market, with only one insurer (representing 6 per cent of the market) currently offering flood coverage. Newfoundland and Labrador, and Saskatchewan are similar to Quebec, with only two insurers offering flood coverage in each province. The federal government and private insurers are now engaged in discussions, along with other stakeholders, with the aim of enhancing access to affordable flood insurance coverage for most Canadians. Improving private sector flood insurance coverage across Canada would help to share flood risk across many insured parties. This should, presumably, reduce the pressure on governments to act as the de facto flood insurer of last report. 5 Data from a recent unpublished survey by the Insurance Bureau of Canada (IBC) were provided to the author. 4

7 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. The Conference Board of Canada 2. Resilience Bonds Resilience bonds are another risk management instrument, related to the impact of climate change, which is appearing in the financial marketplace. Resilience bonds, which are generally available from reinsurers, allow municipalities and other governments to raise debt financing for infrastructure development that is designed to improve flood prevention and mitigation. Financial markets put a value on that increased resilience, which can improve the pricing of the resilience bond, thus lowering the interest rate for the borrower. The resulting savings can then be used by the municipality to fund its risk mitigation efforts. Scale is likely to be an important factor for capturing significant financial benefits from resilience bonds that, so far, have been used for flood mitigation, but not for other catastrophic events like hurricanes. 3. Catastrophe Bonds Another financial instrument is a catastrophe bond (or CAT bond), which is meant to raise money for an insurer or reinsurer in the event of a catastrophe. CAT bonds have been used to cover risks of earthquakes, hurricanes, typhoons, and health claim payments. Presumably they might be used to cover exceptionally high flood losses. Institutional investors, like pension fund purchasers, are the usual buyers: typical terms are usually 3 5 years, with yields higher than corporate bonds. 6 Under the structure of CAT bonds, the bondholder would pay the insurer if a defined event occurs, such as a certain magnitude earthquake, or total property insurance losses of a particular amount. The bond can lower reinsurance costs and free up capital. Some CAT bonds forego the obligation to pay interest or even repay the principal in the event of a specific predefined event. 6 Investopedia, Catastrophe Bond CAT. 5

8 INSURANCE AND RISK MANAGEMENT SERVICES FOR MANAGING CLIMATE CHANGE RISK A Brief Takeaway The insurance market, globally and in Canada, is adapting to the impact of climate change on personal property and public assets. New risk management products are emerging and will emerge that can help to share and manage the insurable risks of climate change and adaptation. 6

9 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. The INSURANCE Conference AND Board RISK MANAGEMENT of Canada SERVICES FOR MANAGING CLIMATE CHANGE RISK Acknowledgements The author of this briefing thanks Michael Burt, Executive Director at The Conference Board of Canada, for providing an internal review. Roger Francis directed the project and provided additional writing and review. This work was funded by members of the Centre for a Clean Energy Growth Economy. About the Centre for a Clean Energy Growth Economy (CEGE) Various factors have buffeted the Canadian economy during the past decades. The result has been that many sectors are forced to operate within uncertain climate change policy frameworks. Energy and energy systems play a critical role, directly and indirectly, in Canada s economy. The concept of a centre focused solely on a clean growth economy for Canada recognizes that our economy needs to proceed in the context of this longer-term, multi-generational transformation. The aim of the Centre for a Clean Energy Growth Economy (CEGE) is to bring together diverse funders to develop a road map for Canada as we progress toward a clean energy growth future. The Centre uses research and dialogue to inform effective and efficient movement toward a clean energy growth economy in Canada. CEGE is focused on providing evidence that frames the journey forward, but that builds on Canada s economic and intellectual strengths without sacrificing economic growth, wealth creation, sustainability, and social well-being. 7

10 INSURANCE AND RISK MANAGEMENT SERVICES FOR MANAGING CLIMATE CHANGE RISK APPENDIX A Bibliography Insurance Bureau of Canada. Media Centre. Toronto: IBoC, Investopedia. Catastrophe Bond CAT Organisation for Economic Co-operation and Development. Financial Management of Flood Risk. Paris: OECD, Parliamentary Budget Office. Estimate of the Average Annual Cost for Disaster Financial Assistance Arrangements Due to Weather Events. Ottawa: PBO,

11 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material.

12 Insights. Understanding. Impact. Insurance and Risk Management Services for Managing Climate Change Risk: Glen Hodgson To cite this briefing: Hodgson, Glen. Insurance and Risk Management Services for Managing Climate Change Risk:. Ottawa: The Conference Board of Canada, The Conference Board of Canada* Published in Canada All rights reserved Agreement No *Incorporated as AERIC Inc. An accessible version of this document for the visually impaired is available upon request. Accessibility Officer, The Conference Board of Canada Tel.: or The Conference Board of Canada and the torch logo are registered trademarks of The Conference Board, Inc. Forecasts and research often involve numerous assumptions and data sources, and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal, or tax advice. The findings and conclusions of this report do not necessarily reflect the views of the external reviewers, advisors, or investors. Any errors or omissions in fact or interpretation remain the sole responsibility of The Conference Board of Canada. 255 Smyth Road, Ottawa ON K1H 8M7 Canada Tel Fax Inquiries conferenceboard.ca PUBLICATION PRICE: Complimentary