Budget Insurance for Natural Disasters: An Innovative Approach to Address Growing Costs of Climate Change in Canada
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ach year, extreme weather events, including floods, wildfires, heatwaves, wind, snow and hail storms pose a serious risk to governments in Canada. These events are growing in frequency and severity, leading to a rise in public and private sector infrastructure damages, economic losses, business disruptions, insurance claims, lawsuits, as well as financial and mental health impacts on people, who experienced these natural disasters. In 2020, Canada’s total economic losses from natural disasters amounted to $4.5-billion, of which $2.4-billion was insured, meaning that nearly half of the economic losses were absorbed by governments, businesses and individuals.
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At a time when the economy in general is under a lot of stress from the COVID-19 pandemic, the question is how can governments ensure they have the resources to support the economic recovery efforts AND respond to natural catastrophes? One answer is budget insurance for natural disasters. Budget insurance for natural disasters is a public sector fiscal risk management tool that provides immediate funds after a natural disaster to expand taxpayer resources and to support the response functions, expedite the recovery efforts and build back better. Budget insurance for natural disasters is not a new concept. In fact, governments have successfully used the private markets (capital markets, insurance and reinsurance) to manage natural disasters for over a decade. For example, the United States Federal Emergency Management Agency (FEMA) purchased reinsurance for the National Flood Insurance Program (NFIP) and collected $1 billion within 10 days of loss notice from a panel of reinsurers in the aftermath of Hurricane Harvey in 2017. In addition to the immediacy at which funds are received, budget insurance provides governments with the flexibility to redirect contingent funds that would otherwise be held to support post-disaster response needs towards other priorities. This flexibility means there are more funds to invest into critical climate adaptation and mitigation projects, so that elected officials can better serve taxpayers in minimizing extreme weather impacts. In its 2019 Canada’s Changing Climate Report, the federal government said Canada has warmed at a rate twice the global average and will continue on that
