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Will Canadians lose their property insurance because of climate change?

flooded house with sandbags in front of it Photo by Marc Bruxelle/Shutterstock

This month, American insurance company State Farm announced that it will no longer be selling new insurance policies to homeowners in the state of California due to high levels of risk brought on by climate change events, such as wildfires and coastal flooding and erosion.

Do Canadians face a similar fate to our southern neighbours? Yes, and no.

As climate change continues to evolve and trigger increasingly extreme—and costly— environmental conditions, more and more Canadians will have to grapple with the loss or destruction of their property. 

A 2020 report by the Insurance Institute of Canada acknowledged that Canada’s climate is already shifting: “Forecasts show the country will be warmer, intense rainfall events are projected to increase in frequency and severity, and increased risk of wildfire ignitions, and a longer fire season is expected to threaten more communities.” Canadians can also expect to see more coastal flooding as ice-free conditions in the Arctic continue to be projected and sea levels rise.

In this way, Canadians do face a similar fate to the U.S., as does the rest of the world. 

The consequences of a changing climate are unavoidable, but when it comes to insuring homes that are subject to risks associated with these changes, Canada’s approach differs from the U.S., in part.

“Most countries around the world facing these problems already have a government-backed insurance mechanism in place,” says Craig Stewart, the vice president of Climate Change and Federal Issues at the Insurance Bureau of Canada. Canada is one of the last countries to develop a program like this “which is unfortunate,” says Stewart, “but also good because we can learn from the others.”

While initially successful, the U.S. National Insurance Flood Program, which Canadian policy-makers have studied, is now facing the consequences of what those in the insurance industry call “perverse incentive,” wherein government subsidies make it more appealing for people to live in high risk areas due to resulting low insurance costs. “The program has been heavily subsidized, and that’s been a problem because homeowners weren’t actually paying for the risk they faced, which means that the program is billions and billions of dollars in debt,” says Stewart.

Canadian policy-makers have learned that maintaining affordability while charging prices that accurately reflect risk is vital in creating a healthy national insurance program. These are guiding principles that will shape Canada’s first government-backed nationwide specialized insurance plan: the National Flood Insurance Program. The program was announced in this spring’s federal budget, with an allotment of $31.7 million, and is expected to be up and running within two years. 

In regions of Canada where risk due to climate change is extreme, we have already seen private insurance companies backing out due to unsustainable costs. In Atlantic Canada, for example, “insurers have essentially shied away from covering storm surge,” says Stewart. “There’s one or two private companies that will insure in certain areas, but the coverage is very expensive.”

One of the goals of the specialized national flood insurance program is to ensure people who live in these regions are not left without financial protections. “We can’t move one and a half million households across the country,” says Stewart. Instead, “insurers and governments are now working together through the specialized national flood insurance program to provide coverage in high risk areas.” 

Where the Canadian model differs from the U.S. is that when this federally-backed program does move in, it will ensure those Canadians are paying for their risk and not just relying on government bailouts.

And it’s not just floods that Canadians will be covered for. Stewart says that the goal is to eventually expand the program to cover other perils, such as wildfires, as they evolve in Canada. 

This program is designed to protect those who live in high-risk regions, but it is not intended to incentivize Canadians to move to or continue living in these areas, if they can help it. 

Increasingly, and unfortunately, coastal regions and settlements near large bodies of water, such as lakes and rivers, are the most at risk for flooding and storm surge brought on by climate change. “That said, we love to live on water, and we love to have cottages on the water,” says Stewart. 

In the coming years, some cottagers may find themselves in a tough situation. As global forces slowly make their way into everyday life, accepting costly adaptation or a lifestyle change might be necessary.

In these uncertain times, it is important to make both short and long-term plans that most realistically reflect your financial and emotional capacity to cope with a changing climate.

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