It wasn’t the first report of its kind, and it may not be the last.
The report cites a wealth of data to illustrate how weather patterns are changing and how severe weather events that can damage property and endanger lives are increasing in frequency, even in Canada, Our Home and Native Land, Where the Really Bad Stuff Usually Happens Somewhere Else.
“These historical and projected trends point to the need for Canada to adapt its existing infrastructure now in order to minimize the social and economic costs associated with severe weather,” the report reads, soundly dumping the burden of responsibility on governments, communities, and individual home and business owners alike.
Debate the extent and causes of global warming and climate change all you want, there is no denying Mother Nature has grown rather moody of late. Just ask the residents of Southern Alberta, who suffered through record floods a year ago. I wrote then about the dicey proposition of owning property in a flood zone, or an area that may not officially fall into a flood zone, but has nonetheless suffered repeat weather events that can leave insurance companies twitchy.
The insurance industry wants to limit its risk
As a property owner, you have to consider how much risk you are willing to take on. As a buyer, remembering that property always has the potential to be both an asset and a liability, you must question why you would/should assume any additional risk and liability.
The organization behind that IBC report, the ICLR, may not be an organization known to many Canadians, but its mandate essentially leaves it in a position to have a profound influence over how the insurance industry as a whole decides how to manage its weather-related risks and liabilities in the years to come. The ICLR was established by Canada’s property and casualty insurance industry as an independent, not-for-profit research institute, intended to help all Canadians adapt, adjust and reduce their exposure to volatile weather and climate.
Whenever the insurance industry talks about this subject, it does so in a rather warm and cozy manner. Protecting Canadians, empowering them to take meaningful action against Mother Nature’s wrath, is the common theme.
I don’t dispute that in-the-public-good mandate. But the reality is, insurance companies already operate with thin margins and, in order to stay in business, have to be profitable. It doesn’t take many years of red ink to drive an insurer out of business. Spreads between premiums and payments to customers to cover claims are narrow. Insurers have to rely on short-term investments of their available capital to generate income. If they find themselves paying out too many claims, there goes their cash flow.
Insurers are already taking action
I have a relative who was unfortunate enough to suffer a burst water pipe twice. The insurer paid out both times, as it was obligated to do. But after the second claim, it refused to continue providing insurance, at any price. I have also heard that insurers are beginning to avoid properties that use oil heating, due to the risks of spills and environmental contamination.
In April, Barbara Turley-McIntyre of the Co-operators insurance agency told delegates at a forum on livable cities in Vancouver that climate change is a reality that communities and governments across Canada must accept and address. She cited the cleanup costs for the Calgary and Toronto floods over the past year, which resulted in $4.8 billion in economic losses. The federal government covered about 90 per cent of that, because flood insurance wasn’t available to many of those affected.
The insurance industry is advising us to be more proactive, to educate ourselves and to take appropriate action to reduce how much of a risk we represent to insurers. It’s advice that shouldn’t be taken lightly.
The City of Chicago, for example, is being taken to task for not heading its own climate action plan and investing in more storm water storage capacity. In April, a group of property insurers sued the city and a number of regional and municipal water managers for failing to take steps the group alleges would have reduced the extent of flood damage caused by a 2013 storm.
This example may be relatively unusual and not specific to Canada, but I think it’s fair to say the writing is on the wall. The burden of responsibility is coming to rest squarely on the shoulders of property owners, both residential and commercial.
So how does this affect real estate: You have to do your due diligence
Understand what risks a property faces and how insurers view both the property and whatever risk factors apply. Given that severe weather events seem to be on the rise, it’s safe to assume that whatever has happened before will happen again; the question is not if, but when. A property you own, or one you want to buy, may simply not be worth holding on to, or purchasing. If you’re unfortunate enough to own a really high-risk property, how do you get out from under what may be ownership liability? Caveat emptor.
Research the types of insurance in terms of who they are meant to protect – the property owner, the municipality, the tenant (if applicable) or the insurer. An insurance policy is a contract. You need to understand your risks, rights and obligations in clear language.
To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.