Insurance industry needs support to address effects of climate change on the built environment

The white paper includes case studies of flood insurance in four countries: Canada, Germany, the United States, and the United Kingdom. Comparisons between these countries reveal the different approach each one takes to insuring against natural hazards. According to the report, major differences include whether the cost of repair and recovery are paid by the government or by the private insurance industry, what is considered insurable, how risk is communicated, how reinsurance is purchased, and market penetration. The paper makes the following key observations in these areas.

Payment
Payment responsibility for flooding damage varies across the four countries. In Canada, where flooding is considered uninsurable, the national and provincial governments bear the costs of flood recovery.   In the United States, the federal government is responsible for selling the vast majority of flood insurance policies through the National Flood Insurance Program (NFIP); while in Germany, both the private insurance industry and the national government help with flood recovery. In the United Kingdom, private insurers pay for flooding damage. Negotiations are currently underway to set up Flood Re, a non-profit flood reinsurance fund owned and run by the UK insurance industry, which will aim to cover damages on high-risk policies.

The paper concludes that the governments of the United States, Canada, and Germany can expect to take substantial budget hits from flooding disaster recovery, while ongoing negotiations make the situation in the United Kingdom less clear.

Insurability
All overland flooding is considered uninsurable in Canada, and certain types of flooding (storm surge and flooding in certain high risk areas) is uninsurable in Germany. For the time being, the United States and the United Kingdom both have safeguards in place to prevent many kinds of property from becoming uninsurable. However, the paper points out that these safeguards come at the price of higher premiums and public demands for subsidies through premium caps or exemptions.

Communicating risk
In Germany, the United States, and the United Kingdom, flood risk is communicated through a combination of flood-hazard mapping and insurance prices. Private insurers take the lead on risk mapping in Germany; while the national government is responsible for doing so in the United States and the United Kingdom. Since Canada does not offer flood insurance, it is solely up to land use experts to communicate flood risk to property investors. The report also notes that inadequate flood mapping in Canada remains an obstacle to introducing flood insurance.

Reinsurance
The U.S. government does not require the NFIP to buy reinsurance; instead, claims exceeding reserves are borrowed from the U.S. Treasury. In Germany and — at least currently — in the United Kingdom, the private insurance industry buys reinsurance on the international market. The paper points out, however, that the United Kingdom may soon shift to the Flood Re program for reinsurance.

Market penetration
In response to low market penetration of natural hazard insurance in Germany, the German government has made several attempts to make the purchase and sale of flood insurance mandatory. The German Insurance Association, however, has repeatedly seen success arguing against this push for obligatory insurance. In the United Kingdom, flood insurance is bundled into standard homeowner and building insurance policies. While purchase of flood insurance is technically not required, the United Kingdom still sees a very high market penetration across all risk categories. The paper notes that together with cross subsidies from lower risk categories, this high market penetration is meant to keep flood insurance for higher-risk properties affordable.

— Read more in What the Real Estate Industry Needs to Know about the Insurance Industry and Climate Change (Urban Land Institute, 2014)