Feds commit $15 million to flood insurance backstop. Is it enough?

Although the federal government committed to forge ahead with its long-awaited flood insurance backstop Tuesday, Canada’s property and casualty insurance industry notes the 2024 federal budget was light on details – and funding.

The insurance industry has been negotiating with the federal government for seven years to implement a flood insurance backstop to cover high-risk Canadian properties. Chief among the budget items was a commitment to establishing a government reinsurance backstop as part of the plan.

“As announced in Budget 2023, the government intends to deliver a flood reinsurance program and a separate insurance subsidy for households at high risk of flooding,” the document reads. “Budget 2024 announces the government’s intention to establish a subsidiary of the Canada Mortgage and Housing Corporation (CMHC) to deliver flood reinsurance.

“To advance this commitment, Budget 2024 proposes to provide $15 million to the [CMHC] in 2025-26 to advance implementation of a national flood insurance program by 2025.”

The seed money for the CMHC subsidiary in 2024 is in addition to the seed funding of $31.7 million the federal government provided last year to help create flood mapping and establish other aspects of the new flood insurance program.

But is $15 million enough to establish a flood reinsurance company?

“Frankly, it’s not enough to operationalize this program and provide the 1.5 million Canadians with the flood protection they need for upcoming flood seasons,” Insurance Bureau of Canada president and CEO Celyeste Power told IBC’s financial affairs symposium Wednesday.

“We have more work to do, and we are all ready to do it. We will work with the provincial governments across the country to spur conversations between them and the federal government on this critical program and we will advocate that additional funding be secured in the Fall economic statement.”

Timing is everything

IBC says it hopes to have the flood insurance program well underway by the next federal election – expected to be called in 2025. And the budget document indicates the federal government is committed to that timeline.

“The government is advancing work with provinces and territories, in partnership with the insurance industry, to stand-up a low-cost flood insurance program for high-risk properties within the next twelve months,” the budget document reads.

But IBC says those negotiations between the federal government and the provinces have not started yet, which puts the 12-month timeline at risk.

“Canada’s P&C insurance industry and the federal government have already begun working to rapidly scale and start delivering the program in 2025,” Power noted in a statement shortly after the budget was released.

“However, the needed conversations between federal and provincial governments have yet to take place. Without the required federal and provincial funding arrangement, Canadians at the highest risk of flooding will not be adequately protected.”

Build back elsewhere?

It was not lost on the insurance industry that the centrepiece of the federal government’s 2024 budget is to build 3.87 million new homes in Canada – without any assurances they would not be built in flood-prone areas.

At the Swiss Re breakfast held in Toronto Tuesday, Canadian Underwriter asked Gianfranco Lot, chief underwriting officer of P&C reinsurance at Swiss Re, about incentives to move homeowners out of floodplain areas. (Assuming Canadians know where they are: the 2024 budget did not provide an update on last year’s commitment to build flood maps.)

In Europe, Lot notes, the emphasis has been on preventing new structures from being built in known flood zones, as opposed to re-locating homeowners of out their existing properties in high-risk flood areas.

“Moving people out of existing [homes in flood plains], it’s very difficult. It’s politically very, very tough,” says Lot. “So, what politicians and governments attempt to do is address the issue of flood by protecting the villages or cities that are built on floodplains. For new buildings, new construction, the steering incentives set by government-type entities works. Because people are not going to build in flood plains, either because you have a tax disadvantage or because it’s just very expensive to build.

“The insurance industry has a role to play because those risks [i.e., new buildings constructed in flood plains] have higher premiums. They are more expensive to insure, and therefore the house values are smaller.

“So, I think incentives work for new buildings, for new construction. But for existing construction, there is just a political difficulty trying to address that. In fact, there haven’t been a lot of shifts in people moving out from existing floodplains. All around the world, they tend to stay where they are.”

Power observes the feds’ 2024 budget is silent on the topic of disincentives addressing the construction of new buildings in high-risk flood areas.

“Program eligibility requirements [of the National Flood Insurance program] should discourage further building in floodplains while incenting protection for those who already live in them – a critical requirement absent from the just announced federal housing plan to build 3.87 million new homes,” she says.

Feature image courtesy of iStock.com/AWSeebaran