Flood­ing the in­sur­ance mar­ket

Advertiser (Grand Falls) - - Editorial - Rus­sell Wanger­sky Rus­sell Wanger­sky’s col­umn ap­pears in 35 SaltWire news­pa­pers and web­sites in At­lantic Canada. He can be reached at rwanger@thetele­gram.com — Twit­ter: @wanger­sky.

One of the smartest peo­ple I’ve ever met was a math ma­jor I knew in univer­sity: with his stel­lar marks, he could have gone on to a doc­tor­ate with ease. In fact, he had offers — healthy offers — for post­grad­u­ate work pretty much across North Amer­ica.

In­stead, he was of­fered what was, back then, huge money right out of un­der­grad­u­ate math.

Not to go back to school, but to do ac­tu­ar­ial stud­ies of risk. For the in­sur­ance in­dus­try. That’s why, in all the talk of whether or not there are risks from cli­mate change — or, for some peo­ple, whether there even is such a thing as cli­mate change — I’d ar­gue you have to watch the money. The in­sur­ance money.

In the last cou­ple of years, Cana­di­ans have started to see offers from their home in­sur­ers for over­land flood­ing cov­er­age. Many don’t re­al­ize that their home­own­ers’ poli­cies mean they are likely for hav­ing shin­gles ripped off by wind or a tree top­pling onto their houses, but not for wa­ter ris­ing and flood­ing their homes.

There are a cou­ple of rea­sons for that.

One of the big prob­lems in the past has been poor and out­dated flood-zone map­ping in Canada — such map­ping, though, is a dou­ble-edged sword.

When U.S. Fed­eral Emer­gency Man­age­ment Agency flood maps changed af­ter the flood­ing caused by hur­ri­cane Sandy in 2012, propos­ing a dou­bling of the area at high risk from flood­ing, a RAND Cen­ter for Cat­a­strophic Risk Man­age­ment and Com­pen­sa­tion study for the City of New York es­ti­mated the pric­etag could be high for res­i­dents who had cov­er­age: “A $429 an­nual pre­mium on a struc­ture pre­vi­ously out­side the high-risk zones could well rise to $5,000 to $10,000 for the same amount of cov­er­age if it is in­side the high-risk area.”

That’s be­cause in­sur­ance com­pa­nies aren’t dumb. (In the United States, by the way, over­land flood in­sur­ance is of­ten a re­quire­ment, and can be bought from the fed­eral Na­tional Flood In­sur­ance Program or pri­vate in­sur­ers.)

Lack of flood-risk map­ping in Canada might have kept in­sur­ance com­pa­nies out of the over­land-flood­ing in­sur­ance mar­kets for years be­cause, not know­ing the risks, they pre­ferred to avoid the cov­er­age. (Over­land flood­ing, keep in mind, is fresh­wa­ter flood­ing com­ing into your home or busi­ness, not salt­wa­ter flood­ing from ocean events. Sewer flood­ing or back­ups is gen­er­ally cov­ered through other parts of your pol­icy.)

Other con­sid­er­a­tions that have kept the flood­ing cov­er­age from be­ing of­fered has been the low num­ber of homes af­fected by in­di­vid­ual flood­ing: there has to be a tip­ping point, a block of peo­ple will­ing to buy the flood­ing poli­cies. The pre­mi­ums have to be bought by and cover enough Cana­di­ans to make the in­sur­ance pool both self-sus­tain­ing and prof­itable. That hasn’t been the case in the past.

Now, how­ever, it is — not in the least be­cause there has been enough sig­nif­i­cant over­land flood­ing in Canada in re­cent years for the mar­ket to sud­denly be­come at­trac­tive.

Things change — life ex­pectan­cies, build­ing codes, au­to­mo­bile ac­ci­dent rates and even flood risks — and in­sur­ance com­pa­nies re­act. They hire the very best peo­ple they can to make sure they have the best and most ac­cu­rate in­for­ma­tion the can get, and the best minds they can to do their ac­tu­ar­ial and sta­tis­ti­cal work. They pay well for it be­cause that kind of knowledge and skills are a valu­able in­vest­ment. Hur­ri­cane Sandy was valu­able in­for­ma­tion about flood lo­ca­tions, flood zone ex­pan­sion, and in­sur­ance mar­kets: hur­ri­canes Har­vey and Irma will be ex­actly the same thing. All were or will be sub­stan­tial pay­outs, but also added in­for­ma­tion: in­ter­est­ingly, the RAND study points out that hur­ri­cane Sandy saw some in­sur­ance com­pa­nies find a dif­fer­ent tip­ping point, and pull out of flood­ing cov­er­age en­tirely.

Be­cause in­sur­ance com­pa­nies aren’t dumb.

They can’t af­ford to be.

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