Canada’s increasing disaster costs are putting pressure on government finances and costing private insurers billions.
Why Canada’s Property Insurance System is Under Strain
Disasters that were once considered “once in a century” events now occur every few years. This means that insurance companies and reinsurers are not only paying out more, but also more often. A quick look at the national picture shows why the system is under pressure:
- According to Catastrophe Indices and Quantification (CatIQ), average insured catastrophic losses in Canada exceed $2 billion annually. For comparison, between 1983 and 2008, Canadian insurers averaged only $422 million in severe weather-related losses per year.
- 2023’s wildfire season recorded Canada’s largest burn area in history. According to the Canadian Wildland Fire Information System, over 15 million hectares were burned.
- Floods alone, according to the Office of the Parliamentary Budget Officer (PBO), are expected to cost the federal government $1.2 billion per year.
Read More: Read About Canada’s Reinsurance Market and Climate Risk
When Insurance Pulls Back, Taxpayers Step In
Provincial and territorial governments determine how disaster financial assistance will be provided to communities and people within their jurisdictions.
Public Safety Canada provides support to disasters that occur on or after April 1, 2025, through five Disaster Financial Assistance Arrangements (DFAA) funding streams. Funding varies depending on the DFAA funding stream and province or territory.
Total assistance from all sources of government cannot exceed 100% of an eligible expense.
International Models: What Canada Can Learn
Similarly important are the details of the program including premium rates, cross-subsidy within the program, caps on benefits, disaster risk reduction requirements, public guarantees, and who is responsible for any shortfall.
Although these programs in Australia, such as the Cyclone Reinsurance Pool, a public corporation that is essentially a reinsurance contract with insurers backed by a $10 billion Commonwealth guarantee, and New Zealand, whose Natural Hazards Cover is a public first-layer of cover for specific perils funded by a levy on eligible private home insurance, indicate that government intervention can be explicit and well-funded and clearly linked to insurance, they do not necessarily suggest that government-backed disaster reinsurance pools would benefit all Canadians with lower premiums.
Read More: See How a Canadian National Flood Insurance Program Could Work
What a Canadian Public-Private Risk Pool Could Look Like
Potential Benefits
- Canada could create a public-private risk pool: a more targeted layer to address an access gap, for example, flood, wildfire, or other hazard(s).
- Depending on its final design, the proposed risk pool could divide responsibility between private insurers and the public sector in different ways.
- Preserves a price signal while helping eligible households.
- One option for additional capacity could take the form of a Canadian public-private risk pool to help deal with an infrequent bad year.
- A Canadian public-private risk pool has the potential to reduce future losses through property- and community-level mitigation.
- Canada’s public-private risk pool could go a long way to reducing, not just continually financing, risk.
Potential Tradeoffs
- Combining unrelated perils in a pool could make it unclear which policyholders are cross-subsidizing whom.
- Different models of a Canadian public-private risk pool have been considered. Administration and incentive effects differ based on the way in which the pool is established.
- There are two main requirements for the risk pool subsidy in Canada. It needs a source of funds as well as an eligibility criterion.
- If claims exceed fund balances, taxpayers will be on the hook for tail risk.
- Certain households would not be able to conduct the upgrades without grant support.
- Restrictions will affect local decisions, housing supply, and property values.
Similarly, any suggestion for a sound and viable ‘public-private pool’ should include information on eligibility and peril criteria, deductibles and policy limits, how premiums would be priced and subsidies financed, how losses would be financed, and what happens after multiple losses occur.
Without that kind of information, a ‘public-private pool’ is nothing more than words.