The frequency and severity of natural disasters is increasing across Canada and the government must collaborate with the private sector to develop innovative, and effective solutions, says Glenn McGillivray, Managing Director (MD) of the Institute for Catastrophic Loss Reduction (ICLR).
In recent times Canada has experienced an increased number of more severe natural catastrophe events, underlined by widespread flooding in Alberta in 2013, and the unprecedented impact of the Fort McMurray wildfires in 2016.
According to a recent article by Glenn McGillivray of ICLR, these two events alone resulted in the federal government directing a combined $3.1 billion to Alberta for disaster assistance, which highlights a substantial unbudgeted cost that ultimately falls on the tax payer.
“But it needn’t be this way, as there are now many traditional and non-traditional reinsurance products that can be used to transfer all but the very biggest risks off the backs of taxpayers and onto the balance sheets of some of the world’s largest and most capable risk-transfer experts,” says McGillivray.
Public-private partnerships and cooperation across the globe with regards to natural disaster preparedness and response vary greatly, but McGillivray notes that generally, governments are showing an increased desire to pass their catastrophe exposure to willing and able insurers and reinsurers.
In light of increasingly severe and costly catastrophe activity in Canada McGillivray calls for the region’s government to seriously look at adopting both traditional and non-traditional risk transfer solutions – improving the country’s resilience to natural disasters while removing the burden from tax payers.
As seen in Africa with the African Risk Capacity (ARC), the Caribbean with the CCRIF SPC, and also with the Turkish Catastrophe Insurance Pool (TCIP) in Turkey, among other schemes, a combination of traditional and non-traditional, or alternative risk transfer solutions can be hugely beneficial to a region’s disaster risk financing needs.
Specifically, but by no means exclusively McGillivray highlights parametric structured solutions, commonly utilised in the insurance-linked securities (ILS) and catastrophe bond space, as a viable and effective means of risk transfer that could really benefit Canada in its fight against rising natural catastrophe losses.
“Imagine an insurance product that kicks in if a city’s snow-removal expenses exceed a certain threshold, or one that reimburses a municipality or public utility if storm-related overtime costs exceed a certain amount? 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 private reinsurance industry altogether?
“What about a parametric cover that kicks in if a rainstorm, windstorm or snowstorm of a certain size affects a community?” questioned McGillivray.
A huge benefit of parametric solutions is their ability to rapidly disburse funds to those in need owing to predetermined payment triggers being met, which are typically simple to define, such as a hurricane passing through a certain area at certain intensity.
This helps the recovery process begin at a far quicker rate than with some other insurance solutions, such as indemnity protection, for example.
Many regional disaster risk schemes, pools and so on utilise both traditional and alternative re/insurance industry solutions and capacity to develop the most effective and comprehensive solution for its members.
But as explained by McGillivray, “One of the challenges that has to be overcome is that governments typically do not leverage the many reinsurance and financial instruments that are available to them.”
This might be due to reluctance from the government to pay up-front costs for the implementation of the solution, as generally, says McGillivray, governments tend to be risk neutral.
At the same time, “some reinsurers are not quite used to approaching certain governments about how they can help manage and temper expenses associated with natural disasters and other expenses related to severe weather,” explained McGillivray.
The risk landscape continues to change across the world and Canada is no exception. While it’s uncertain exactly why catastrophe events appear to be increasing in frequency and severity in Canada, and elsewhere for that matter, the ability of the insurance, reinsurance, and ILS sectors to work with public sector entities to improve disaster risk financing, preparedness and recovery is apparent.
“This is an imperative, as the frequency and severity of natural disasters is increasing in Canada while the pressure is on for governments to cut taxes while also grow services and invest in public infrastructure,” concludes McGillivray.