Disasters

Budget Insurance for Natural Disasters: An Innovative Approach to Address Growing Costs of Climate Change in Canada

Each 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.

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 trajectory in the future. According to Canada’s Expert Panel on Sustainable Finance, whose membership included Tiff Macklem, current Governor of the Bank of Canada, “The effects of climate change are upon us. Shifting weather patterns are amplifying the natural risks we already face – floods, storms, heat and drought – leading to more frequent and extreme loss events. Preparing for and adapting to the current and future impacts of climate change is a critical aspect in managing risk to our communities, businesses and ecosystems.”

Although governments across Canada face different climate change challenges, the need to stretch budgets to respond to natural disasters is common. Budget insurance for natural disaster offers governments an eloquent way to unlock adaptation capital today, in anticipation of bigger disasters tomorrow.

NATALIA MOUDRAK, Director, Climate Resiliency Leader, Aon Public Sector Partnership. Natalia advances the development of innovative solutions that create greater climate change resiliency for Aon’s public sector clients. Prior to joining Aon, Natalia worked as a Director of Climate Resilience at the Intact Centre on Climate Adaptation at the University of Waterloo.