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Canadian insurers call for climate scores on houses

© Shutterstock / Paul McKinnonPost Thumbnail

Trade association Insurance Bureau of Canada is calling for climate risk scores and disclosure frameworks for the country’s housing market as natural disasters become more frequent and severe.

  • The Insurance Bureau of Canada (IBC) and the Canada Mortgage and Housing Corporation (CMHC) have recommended climate risk disclosure for residential housing.
  • An increasing number of extreme weather events has led to cancellation of some homeowner insurance, usually a requirement for a mortgage. 
  • Developing an action matrix would provide transparency across the entire value chain, as well as vital information across communities to develop resiliency plans.

Addressing the growing problem of climate risk 

The cost of weather-related insured catastrophic losses in Canada has doubled in the last decade, according to the Canadian climate institute. The average cost per disaster is also up 12.5 times since the 1970s, with 10% of all households facing a high risk of flooding. In 2021 alone, based on the report produced by IBC and CMHC, the insurance industry faced losses of over CA$2 billion.

This prompted the sector to develop relevant policies, as well as a framework to identify and measure risk from extreme weather.  To do this, IBC and the CMHC convened a series of workshops and interviews with sixteen stakeholders from the housing finance and insurance industries in December 2021. 

The findings suggested the importance of connecting known and existing risks, to form an action matrix and to develop a climate risk score that could be easily used by all housing stakeholders.

Climate risk score to help insurers and mortgage lenders assess property values

A credit score provides lenders with a gauge of an individual’s ability to afford a mortgage. The IBC and CMHC report recommends the development of climate-risk scores to assess a location’s susceptibility to catastrophic loss. This would help mortgage providers accurately assess the value of a home, and give insurance companies a realistic view of loss liability. 

The IBC has estimated that over a million homes in Canada, or around 10% of the total,  are at high risk of flooding, while some are also at an elevated risk of flooding over the next 20 years.

Reports of insurance being cancelled due to the threat of floods could risk people losing their homes. While it is not required by law in Canada, most mortgage lenders typically require homeowners to carry insurance, according to the IBC – and this is true in many countries.

Define an action matrix to inform marketplace and drive resiliency investment

The report by IBC and CMHC urged swift action to enable disclosure of risk, and develop a policy framework. A major barrier to disclosure was the risk of property devaluation, and whether stakeholders, especially homeowners, would be willing to include climate risk in property listing, sale and mortgage documentation. 

Researchers recommended developing an action matrix to provide transparency across the entire value chain, as well as vital information across communities to develop resiliency plans. The information could also be used to mobilise capital towards developing property-level and community-level adaptation measures for local and regional governments.

A report by the Canadian Government, Adapting to rising flood risk, warns that without adaptation and risk mitigation, the cost from flooding in at-risk areas will continue to rise. According to the report, adopting national guidelines for the flood resilience of buildings can save homeowners eleven times the related cost. 

Investments in mitigating floods at the community level were shown to have a six times return on investment. The Government also established a link to lower insurance premiums resulting from such measures.

Establishing climate compatible communities before 2050

The IBC and CMHC have set a goal for creating a climate-compatible housing system in Canada before 2050, in recognition of the rising catastrophic loss to people and communities from climate-related disasters. The timeline involves completing building resiliency programmes for all homes in Canada by 2030. After establishing a policy framework for disclosures in 2023 or 2024, the Canadian Climate Compatibility Scoring Framework is expected to be established in 2025. 

IBC and CMHC have said they hope the application of this framework will help meet national adaptation strategy targets by 2028, and also help drive towards Canada’s net zero goals by 2050.

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