A few thoughts on incentivizing mitigation

When it comes to the issue of financially incentivizing homeowners to install mitigation measures to reduce the potential impact of severe weather or an earthquake, it appears that much of the burden is placed squarely on the backs of insurers.

But while insurers certainly have a role to play in incentivizing mitigation, the onus cannot be solely on them, as often the math just doesn’t work.

Carrot and the stick

From a carrot and stick perspective, insurers may very well have more leverage using the latter than the former. While carrots are certainly more desirable – for both insurer and insured – offering premium discounts to reward mitigation often only go so far. Awarding, say, a 10 per cent discount for snow tires may be effective because 1) snow tires generally aren’t all that expensive and 2) the discount would apply across a large portion of the premium (i.e. on collision and DCPD, though not on comprehensive). However, offering a 10, 15 or even 20 per cent discount for installing a sump system and backwater valve likely won’t be all that effective given that 1) it would cost several thousand dollars to install these measures and 2) the discount would only apply to the water damage and sewer backup portion of the premium. Would a $10 or $20 discount incent a homeowner to put in, say, $3,500 in measures? Not likely. (That being said, Aviva Canada recently revised its Sewer Backup Endorsement to include a $1,000 payment to insureds who have had a covered sewer backup loss, to install mitigation. This is a trail blazing move that may spur other carriers to follow suit.)

The stick, on the other hand, may involve the use of premium and/or deductible increases, the levying of peril-specific deductibles (eg. separate, higher deductibles for sewer backup or hail over other perils), implementation of caps/sublimits, and partial or total policy cancellation.

There can be no doubt that these hard measures can make an insured sit up and take notice. However the danger is that pushing too hard could spur the insured to move his or her business elsewhere. What’s more, insurers can’t price themselves out of every corner, an important consideration given the hyper competitive insurance market and the fact that severe weather will only get worse in the years ahead. Mitigation, then, becomes the only sustainable alternative.

The role of government

With their unique ability to set rules, regulations, guidelines and laws; establish and institutionalize building codes, building code enforcement and inspection; and provide incentivizes and disincentives to promote good risk-taking behaviour through taxation, governments have at their disposal a wide array of tools needed to ensure that individuals and communities as a whole take the steps that are necessary to protect against the impacts of severe weather and earthquake. As such, government of all levels in many places in Canada, the U.S. and elsewhere have taken part in some forms of financial incentivization of mitigation, though it is clear that such offerings need to be improved and expanded.

In the United States, there exist a multitude of federal laws and programs that offer funds for the installation of mitigation measures. These include the Stafford Disaster Relief and Emergency Assistance Act, which has a mitigation assistance component to it; FEMA’s Hazard Mitigation Grant Program and Pre-Disaster Mitigation Grant Program; and the NFIP’s Severe Repetitive Loss Program, to name but a few (many of these programs are outlined here).

In Canada, the federal Disaster Financial Assistance Arrangements (DFAAs) were amended in 2008 to include a provision for cost sharing of up to 15 per cent of the estimated cost of mitigative enhancements to private infrastructure.

On the individual state side, several U.S. states that are exposed to hurricanes have programs to incentivize homeowners to install mitigation measures. Each year, for example, the State of Virginia has a Hurricane Preparedness Sales Tax Holiday for a week in May which gives state residents the opportunity to purchase a specified list of goods tax-free prior to the start of hurricane season. A number of other states, such as Florida, Texas and Louisiana also provide for such a tax holiday for hurricane preparedness. Several states also provide for income tax deductions for hurricane mitigation measures, including Louisiana and South Carolina, and the state of Colorado allows a tax deduction of up to US$2,500 for homeowners who perform wildfire mitigation measures.

Some states, such as Florida, Alabama, Maryland, Mississippi, New York and North Carolina also mandate insurance premium discounts for the installation of mitigation measures.

On the earthquake side, the California Residential Mitigation Program (CRMP) was created in 2011 through a Joint Exercise of Powers Agreement between the California Office of Emergency Services and the California Earthquake Authority. The CRMP’s goal is to provide incentives to California homeowners to seismically retrofit wood frame residential structures. The first of these incentives is currently being piloted through the Earthquake Brace + Bolt program, providing up to US$3,000 to participating homeowners in limited locations in Oakland and Los Angeles.

No such programs exist in Canada, but they easily could. There are several examples of recent government incentive programs that could be modified to contain a property damage mitigation element.

For instance, in a bid to spur economic recovery, the federal government in 2009 offered a temporary 15 per cent tax credit to eligible home renovation expenditures for work performed or goods acquired during a set period of time. In the recent past, the federal government has also awarded grants to homeowners who retrofitted their homes to make them more energy efficient. Grants were made available to those who completed specified retrofits and had post-retrofit evaluations conducted to ensure compliance with the program. Most provinces and territories at the time put complementary programs into place in order to further encourage energy-minded housing improvements.

On a municipal level, there are several examples in Canada where local governments provide grants and subsidies to homeowners willing to take measures to guard against basement flooding. Subsidy programs have been developed by some municipalities with the goals of increasing homeowner uptake of measures including downspout and foundation drain disconnection, backwater valve installation and sewer lateral repair. (In Manitoba, the provincial government appears to be the only one in Canada that teams up with municipal governments to help finance such subsidy programs.) Many of these municipal basement flood subsidy/grant programs are listed on ICLR’s basement flood risk reduction website.

Moving forward

Property damage risk reduction incentives offered by insurers tend to be largely uniform, with premium discounts serving as the anchor for such offerings. Government-based mitigation incentive programs, on the other hand, tend to be more wide-ranging with some being downright unique, and it is precisely this type of out of the box thinking that is desperately needed to move Canadian homeowners to make changes to their properties to get losses down.

Canadian insurers need to continue to forge good relations with governments at all levels to bring more and more unique mitigation programs to the fore. And wherever possible, insurers should consider establishing incentives that mesh well with government programs.

There is certainly no shortage of good examples to ‘borrow’.