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magazine / oct10

October 2010 issue


Discovery

Tradition   |   Insurance   |   Industry   |   Case Study   |   Analysis   |   Recreation   |   Miscellany

INSURANCE
Global warming insurance
Extreme weather is topping the list of insurance claims
By Craille Maguire Gilles

Photo: flickr/Number Six

When the torrential rains came, swimming pools formed in residential basements. Panic spread as people gathered essentials and fled their homes, at least one person escaping in a canoe. “Most of the people who we’ve evacuated have lost everything,” a Red Cross worker told a reporter. Catastrophic damage occurred over mere minutes, as if a levee had broken, and some of the homes may never be salvaged.

This wasn’t the Ninth Ward of New Orleans or a town beside the Red River in Manitoba. It was July in Yorkton, a small city in southeast Saskatchewan where summers are usually short, warm and fantastically sunny — compound interest for the long, cold winters.

After the storm passed, one of the first things most people in Yorkton did was head to their local insurance agents to start the long, expensive process of rebuilding. This scenario is becoming more common, reports the Insurance Bureau of Canada (IBC), and is leading to a sea change in how the insurance industry operates. For one thing, more catastrophes mean that premiums could rise, just like the flood waters.


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“The insurance industry is like a canary in a coal mine,” says Robert Tremblay, director of research at the IBC. Tremblay’s stats could be cribbed from an Al Gore gloom-and-doom documentary: in the 1960s, extreme weather caused about $2 billion in claims worldwide, a sum that doubled in the 1970s. “In the 2000s,” says Tremblay, “we’ve seen it go to about $28 billion worldwide.”

Paul Kovacs, executive director of the Institute for Catastrophic Loss Reduction at the University of Western Ontario, calls climate change the “new fire.” When the insurance industry got its start in Canada in the early 19th century, it sold mostly fire coverage. “What’s happened has caught the industry by surprise,” says Kovacs. “The number-one cost for insurers until recently was fire, and theft was number two. In the last five years, though, climate-related costs — particularly flooding — have exceeded fire claims.”

In fact, climate-related claims could price many of us out of our financial safety nets. The traditional formula described by Tremblay — “everybody puts a bit of money into the pot, and if something happens, your asset is covered” — could become obsolete. Part of the solution, insurers hope, is to address adaptation by building structures that can withstand fiercer winds and by improving what Tremblay calls Canada’s infrastructure deficit.

While most insurance contracts don’t yet include specific references to climate change, which can be difficult to tease out from natural disasters and other factors such as crumbling infrastructure, down the road it’s a possibility. This could lead to perks for proactive clients. Like a driver with a clean record getting a discount, a homeowner with a backwater valve to protect against storm-water surges could get a price break.

Fortunately, insurers are risk-management experts. The IBC is working on a “municipal storm and sanitary infrastructure risk-assessment tool” to give companies more accurate details on what they’re underwriting. Bringing together the expertise of climatologists, engineers and others, geographic information system maps will let municipalities identify vulnerable areas. (If the City of Stratford had had this tool in 2002, it might have avoided a $7.7 million payout to insurers and residents for flood damage caused by faulty sewer infrastructure, plus the $1.3 million the city spent on emergency compensation.) Currently being tested in Hamilton, Halifax and Winnipeg, the IBC’s map tool should be finished by late 2011 and rolled out across Canada.

Meanwhile, at Kovacs’ Insurance Research Lab for Better Homes, in London, Ont., a team of engineers is simulating extreme rain, wind and snow on its “Three Little Pigs” house. The insights they are gathering will help identify ways to make buildings that can withstand the very things you insure them against. With such breakthroughs, perhaps someday people in Yorkton won’t have to paddle their canoes from their flooded homes to their insurance brokers.


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