May 5

Paul Kovacs, Executive Director, Institute for Catastrophic Loss Reduction (ICLR) and President, Property and Casualty Insurance Compensation Corporation

Paul Kovacs reminded participants that Emergency Preparedness Week (concurrent with the conference) was designed to raise awareness across the country and to prompt Canadians to reflect on local perils and how disasters could be managed.

Every year, the ICLR retrofits a home for disaster preparedness, Kovacs explained. In Vancouver, for example, a house was retrofitted for earthquake resistance, while another in Southern Ontario was modified with tornados in mind. This is adaptation in practice, he said, but there are other ways to garner broad public support.

How is climate change perceived in the insurance industry? Kovacs stated that, with increasing claims, companies think about this issue constantly. Last year $50 billion was paid out, in part due to the 2004 Asian Tsunami. In Canada alone, the industry paid one-quarter billion dollars for the recent Kelowna wildfire. With such claims, the industry clearly thinks about climate change and how it relates to costs.

International data show that costs to insurance companies are doubling every five to seven years. Drawing a trend line through this data would mean that by 2065 “everything is gone,” said Kovacs. While this may be exaggerated, the current trend cannot continue.

Insurance companies certainly back actions that confront the issue squarely, said Kovacs. At the same time, the companies do not understand the technicalities. Adaptation fits neatly into how the insurance industry operates. However, there is an imbalance between mitigation and adaptation, both globally and in Canada. A more aggressive approach and more support for discussions of strategy are needed on the adaptation side.

To address this gap, at least in part, Kovacs established the ICLR, which works to reduce fatalities, injuries, and property damage caused by disasters. These issues need to be addressed from a research perspective to give greater depth to ensuing actions, suggested Kovacs. He added that 90% of the industry supports this approach and has shown a commitment to stay involved.

The primary activity resulting from climate variability in the insurance industry has been the paying out of a growing number of claims, said Kovacs. The insurance industry has also worked to adapt consumer behaviour by demonstrating straightforward actions that protect them and their homes. The home retrofitting project, for example, shows what can be done and is also a media event. Kovacs and the ICLR also engage small businesses in a new program to help them plan for difficult times.

Kovacs emphasized that adaptation must be part of the public policy dialogue and that more funding should be directed at adaptation strategy research. The industry is trying to keep this on the agenda.

Focusing on research needs in this area, Kovacs said that he sees three distinct areas: research in engineering and the natural sciences, behavioural and social science research, and policy research. Research in the first category is readily accepted and easy to grasp, with experiments with wind tunnels, shake tables, and other engineering instruments.

As an economist, Kovacs suggested that research in social science is critical. It does not have comparable visible evidence but is rather concerned with personal action and choice. In this sector, “we want to understand what research is taking place and what factors make a difference to individual choices,” said Kovacs. In terms of policy research, Kovacs said that public policy options that support adaptive strategies must be identified.

Clearly, the insurance industry accepts climate change and would, furthermore, like to participate in supporting adaptive strategies to confront a dangerous and unsustainable trend, summarized Kovacs.

A participant noted that while changing behaviour is more complicated than getting to the moon, economic incentives might provide an avenue. He asked if there is an industry plan to decrease premiums for those who build adapted houses. Kovacs replied that there is an active research program on the question. While current insurance premiums are already small, surveys show that even a reduction in the tens of dollars is appealing to consumers. Moreover, there is non-monetary value in knowing that one’s home is safe. In fact, consumers expect insurance companies to inform them of relevant issues.

Kovacs suggested that a retrofitted home (e.g., hurricane shutters) could have increased resale value and that this might be a much more important incentive to promote adaptive strategies. The ICLR is currently looking for evidence of such a relationship.

Another delegate asked if there is a danger of re-insurance becoming unsustainable given that risk of climate change is so global. Kovacs explained that insurance companies “believe in insurance so much that they buy it themselves.” With re-insurance, for example, insurance companies were able to recover $1 billion of the costs of the ice storm. Thus net costs of severe weather events are always lower to the insurance industry than gross costs. With an increasing number of claims, re-insurers are more outspoken about climate change, noted Kovacs.

Although the risks of severe weather events are spread around the globe, Kovacs said, re-insurers are also in geographically diverse locations, which successfully spreads their risk. The re-insurance industry has engaged in many adaptive changes in the past decade, working with climate change specialists and predictive modeling. “They are professionally positioning themselves,” he said.

2005-04-05