Wanted: New products to lighten the financial burden placed on taxpayers from disasters

As this headline indicates, 2015 may go down as the worst year ever for wildfires in British Columbia. While, to date, insured damages have been relatively low (despite 29 homes being lost in Rock Creek), suppression costs have been well above average. Indeed, the province blew through its $63 million wildfire fighting budget by the end of June, and Premier Christy Clark has estimated that suppression costs may reach $400 million for the year.

Suppression costs are also up in Alberta which, by mid-August, had already experienced a year’s worth of wildfires (1,600 so far). And Saskatchewan isn’t faring much better, with estimates that suppression costs will exceed $100 million when all is said and done, significantly higher than the $56 million budget set aside for 2015.

But with insured damage nowhere near that experienced in Kelowna in 2003 and Slave Lake in 2011, why should the industry care about high wildfire suppression costs?

In my insblog post of April 16, 2014 (Narrowing the gap between insured and economic damage from natural hazards) I wrote that the insurance coverage gap spells opportunity for the (re)insurance industry. In essence, the gap exists – in part – either because the proper insurance products have yet to exist or because no one from the (re)insurance industry has reached out (to governments in particular) to offer solutions to fill voids in coverage.

But the Canadian (re)insurance sector has shown that it is capable of great innovation.

A number of years ago, a block of reinsurers provided a fairly simple stop-loss product to the province of Alberta that was designed to kick in should wildfire suppression costs exceed a certain level (the state of Oregon has been purchasing such coverage from Lloyd’s of London for several decades). The product was only in force for a year or two before the province opted not to renew. Nothing quite like it had been seen in Canada before, and nothing has been seen like it since. But it shows the type of (dare I say it) ‘out of the box’ thinking that is possible.

There is nothing stopping such a product from being put into place again. What’s more, it can be used as a model for other, similar products.

Imagine a cover that kicks in if snow or debris removal expenses exceed a certain threshold, or one that reimburses a municipality or utility if overtime costs exceed a certain amount because of an extreme weather event (like the 2013 Christmas ice storm in the GTA).

How about a simple stop-loss cover that kicks in if federal Disaster Financial Assistance Arrangements (DFAAs) exceed a certain amount, or what if the DFAAs were laid off to the reinsurance industry altogether?

How about a product that provides coverage for municipal assets such as roads, sewers and culverts, which generally fall outside the usual products offered by traditional insurance or reciprocal exchanges?

What about a parametric cover that kicks in if a rainstorm or snowstorm of a certain size affects a community?

Or how about a cat bond for a city or province?

The possibilities aren’t endless, but there are many of them to be sure. And while some solutions may require blazing wholly new trails, other solutions – like those involving simple stop-loss covers and other traditional reinsurance products – can easily borrow from the past.

Essentially, when a natural disaster strikes, taxpayers are – in one way or another – left holding the bag.

Why not leverage the capital strength and expertise of the (re)insurance industry and lighten the financial burden that is placed on citizens?

In many cases, it’s not hard to do.

We’ve already proven that we can think innovatively in the area, we just need to do a better job of reaching out, and explaining the possibilities.