Sharon Ludlow: It's Sink or Swim

Sharon Ludlow: It's Sink or Swim

Sharon Ludlow: It Sharon Ludlow

Let’s get real. Canada needs more than just better flood insurance, says Sharon Ludlow, leader of one of the country’s biggest reinsurers. It needs a real flood policy!

Flood insurance has become the hot topic once again after a record-setting summer for damage claims recorded in Alberta and Toronto. Sharon Ludlow, president and CEO of Swiss Re, the reinsurer most active in that market, outlines why clients and the industry need to stop skirting the margins and embrace flood coverage.

1. Let’s face this head on: Brokers complain that the industry doesn’t seem that interested in moving forward with a comprehensive flood insurance plan. Make your case for why we need proper flood insurance now.

SL: Not only do we need flood insurance, we need a flood program, which goes more broadly. We need to address the resilience of our urban centres – as clearly was shown in the case of Calgary where most of the damage occurred.

Building resilient cities is something we need; a proactive approach to infrastructure that may be missing in urban centres right now.

Following Hurricane Sandy, we did some research on behalf of Mayor Bloomberg in New York City, and the report provided a long list of recommendations on infrastructure.

We need, as an industry, to focus more on infrastructure to mitigate damage, as ultimately that helps Canadians.

2. Cannot sewer backup cover such flooding?

SL: Sewer backup, as you’ve seen in the events in Alberta and Toronto, means different things for different insurers, so it is clearly not consistent. It is solely dependent on where the water hits your business or home, which is different from overland flooding.

Tacking flooding onto an already inconsistent policy is not the solution. What we need to do is step back and examine what is the right coverage for overland flooding. The recent flooding has driven those inconsistencies out into the public domain, for example, Calgary. There are going to be different risks and differing coverage. There are very, very different risks depending on locations, so you can’t just tack flooding on sewer backup.

3. Should flood insurance be mandatory on a general policy?

SL: There are a number of countries in the world that have flood programs. The U.K. has one, the U.S. has one, Germany, Australia... The ones I listed are the ones we’ve looked at and studied here at Swiss Re, and those in the industry have looked at as well. Each have some pros and cons – for example, whether or not it is mandatory, and whether it is bundled with other coverage. We need to be mindful of anti-selection.

I believe you can have a subset of flood insurance for each particular region. We have a category for highest risk drivers in auto coverage; we could have something like that to address high-risk locations.

Clearly, you need to have the right premium to match that type of risk.

4. What should the pricing model be for flood coverage?

SL: Again, it clearly has to reflect the underlying risk. I would broaden that to have the right-risk model; we have to have adequate risk mapping. We do have some, but not at a granular level. We need to be able to compare and determine what the risk looks like, what the right risk and premium should be.

After the Calgary event, we at Swiss Re distributed a CAT-NET model – something we had done jointly with the European Space Agency during the flood and immediately after using satellite images to map the affected regions and area.

We distributed these images to our clients. Some of the larger, more sophisticated companies already use this technology. By applying it across Canada, we can use that technology to produce the right models and be able to price for the risk.

5. What does the industry need to do to sell consumers on flood insurance?

SL: We need to have a very simple, transparent policy that states this is what is covered. Ultimately, that is needed to get consumers comfortable with the coverage they have.

The result of the post-Calgary public outcry, or perhaps sentiment is a better word, was that the differences in coverage and the absence of overland coverage did not sit well with consumers. It is something we need to address.

If we could show through granular mapping that “yes, my house is 10 feet from the river,” or “yes, it is atop a hill, so that is why I am charged this premium,” I believe it would be of benefit. In the U.K., that information is basically available for anyone who wants to see it.

We need to be proactive with municipalities, and at the provincial and federal levels, on infrastructure.

Is there consideration that where we are building is in an appropriate area, or in a zone of potential flooding? 

Having up-to-date accurate flood mapping at that level will help the land-use planners to identify a “no go zone.” 

6. Is there a downside to incorporating flood insurance on a general policy?

SL: As long as we the industry can understand the risk and have the right data to underwrite the risk, then we would charge an appropriate premium for it.

If you have high-risk areas, and they are populated, then we need to address that in a different fashion.

For the population at large, whether it is homeowners or commercial, I don’t see it as a downside – but I don’t think we bolt it onto an existing coverage. We need a fresh, clean sheet of paper: Here’s what it looks like, let’s make it consistent across the industry. A consistency in the principles of what is covered – it is hard to find a downside when you design it that way.

Canada is the only country that doesn’t have a flood program. The National Flood Insurance Program (NFIP) in the United States has not been overly successful, and some people point to that and say, “Do you really want that?”

A different or more rational look might be: we have the ability to assess the pros and cons of those programs and see how they’ve improved on those programs. The U.K. has just announced its recent rounds of improvements. We can pick and choose the best for our program. We aren’t starting from scratch here.

7. Is water damage truly the “new fire”?

SL: We have statistics at Swiss Re that show something like 500-million people are affected by water damage each year. We look at that and say, is that the new fire? The risk of fire in this country has literally dropped off the charts, whereas losses from water damage have risen dramatically – the chart looks like a hockey stick – to the right and sharply up.

Fire has been effectively addressed by building codes. We haven’t done that with water, and with an aging infrastructure, we need protective measures put into place. But these measures have been viewed as too expensive.

8. Why hasn’t flood insurance become as necessary as fire coverage?

SL: The lack of available data on flooding. Insurance companies love data and modelling so they can evaluate to determine risk, and the lack of accurate flood mapping on a granular level is the single biggest obstacle to date. Certainly this problem is not insurmountable. We know the technology is there, and it is even better than what we had only a few years ago, but it does come with a price tag.

As a general statement, the lack of data makes it difficult for an insurer to provide a coverage – we wouldn’t provide a coverage for a risk that we don’t have data on.

The fact that the NFIP has had less than desirable success hasn’t inspired confidence. And looking around the country, the stakeholders here haven’t turned their attention to the issue of flooding. But events such as those in Calgary become a catalyst and instill a sense of urgency.

9. Can the industry sustain another summer of flooding next year?

SL: The final tally is still not out. Swiss Re issued its report on the first half of the year, which did not include the Toronto floods. Right now, we estimate a $2-billion insured loss, $4 billion in economic loss.

I don’t know if our numbers are exactly right, but we anecdotally think most companies will find the floods of this summer the single largest event in Canadian industry.

Clearly, we have seen the companies report their losses and results – and those losses have had an impact – but the industry is still moving along, paying its claims, and everyone is still here and the doors are open. I don’t know if they can do that year-after-year, but most of the companies have a global reach, and they have sustained larger losses to date, like earthquakes and natural catastrophes around the world.

But I don’t think anyone wants to re-live an event like that from a personal or an insurance point of view!

10. Analysts are predicting an uptick in premiums. Can this be avoided?

SL: It is for the insurance companies to determine the appropriate premium for the risks they have. The market will come into play to determine what the rate will be. It’s not necessarily just premium that may be impacted. There are a number of factors that an insurance company would take into consideration before the final premium is set, such as changing coverage.

In conclusion…
As a reinsurer, Swiss Re is actively involved in the assessment and research in the models of countries around the world. We are the only G8 country without a flood program, which makes us an anomaly. We would like to see all the stakeholders move forward to get the right solution for Canada. We are literally cherry picking the pros and cons of programs around the world, and seeing what is best for Canada.