June 4, 2024 — The federal government has been urged to adopt flexible, risk-based pricing for Canada’s pending national flood insurance program.

Last month, the government pledged $15m to establish a subsidiary of the Canada Mortgage and Housing Corp. to provide low-cost flood coverage and subsidies for high-risk properties within the next 12 months.

A pair of University of Waterloo professors said in a policy brief last week that rather than simply distributing the cost of affordable insurance across all taxpayers, the government should adopt a risk-based approach that encourages risk reduction.

“Strategies such as informing policyholders in high-risk areas about the market price for insurance and using a schedule to lower the subsidy over time will encourage risk reduction, discourage development in risky areas and ensure public funds are used efficiently and in ways that contain the costs of climate change,” Daniel Henstra and Jason Thistlethwaite wrote in the brief.

They said a flood insurance program should also strengthen disaster risk reduction by prohibiting the use of funds for rebuilding in high-risk areas, buying out high-risk properties, and increasing information on Canadians’ exposure.

The program is unlikely to be effective if the incentives it generates for risk reduction are undermined by Canada’s fragmented approach to disaster risk management, the authors said.

“(Disaster Financial Assistance) programs must adopt clear rules that explicitly prohibit the use of funds for rebuilding in high-risk areas.”

They said public funds should be used to encourage risk reduction, such as prioritizing buyouts for the small number of properties that inflate the flood insurance program’s economic liability.

And they said reforms should be combined with an aggressive campaign to inform Canadians about their exposure to risk to mobilize political support for prioritizing investments in risk reduction and limit the impact of climate change on insurance affordability.

The researchers also called on the government to leverage the flood insurance increase innovation in insurance markets by improving data acquisition and models to lower costs and customize solutions for underserved communities.

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