International approaches to residential flood insurance

Canada is the one of the last developed nations to start offering flood insurance to its residents. Among other developed nations, no two approach residential flood insurance in the same way. Some have opted for private programs, while others have opted for public programs. Flood insurance protection is mandatory in some nations and voluntary in others. The way in which protection is priced and funded also differs. The one thing that doesn’t differ across nations is the continuing struggle to offer residents a viable flood insurance program.

Provided below is information on the flood insurance programs offered in select countries across the world. The experience from these countries, as well as others, is helping to shape the Canadian approach to residential flood insurance.

Australia

Residents in Australia are able to purchase flood protection from private home insurance providers. While the government doesn’t offer protection, it has created a standardized flood definition that is used by all home insurance providers.

Most Australian home insurance providers have decided to automatically include flood protection in home insurance policies. As a result, 93% of residents are protected against flood. Pricing for flood protection in Australia is based on the level of flood risk faced by residences.

For those living in areas with an extreme flood risk, the home insurance premiums skyrocketed once flood protection was automatically included. As a result, some providers now allow residents living in extreme risk areas to remove flood protection from their policies.

France

In France, flood insurance is offered by the government and not by private home insurance providers.

Flood insurance is mandatory. It is automatically included in all home insurance policies and it is bundled with protection for other natural disasters. Instead of risk-based pricing, the government sets one standard price for flood protection across all home insurance policies.

The greatest challenge the French flood insurance program faces is that its residents have no incentives to invest in risk mitigation. Doing so will not result in lower premiums, so why invest? The French program also forces those in low-risk areas to subsidize those in high-risk areas.

Germany

German residents can purchase flood protection from private home insurance providers. Purchasing flood insurance is voluntary, meaning residents can decide whether or not to add it to their home insurance policies. German insurance providers use risk-based pricing to offer flood protection, instead of a government set price.

The downside of the German approach is that the flood insurance market currently has a high concentration of extreme flood risk properties. Few people in low risk areas are purchasing the optional flood insurance protection. As a result, prices for flood insurance protection are quite high. To combat this, coverage is limited in some areas.

Japan

Japanese residents purchase flood insurance from private insurance providers. It is only available when bundled with underlying home insurance policies. Unlike in France, purchasing flood insurance is voluntary in Japan. Also unlike in France, risk-based pricing is used in Japan.

It is interesting to note that Japan is one of the few countries to offer protection against coastal flooding, including tsunamis. Most other countries only cover inland flooding. That said, few Japanese residents purchase flood insurance. This is surprising given the country’s history of flood damage.

United Kingdom

For UK residents, purchasing flood protection is completely voluntary and it is bundled with their home insurance policies.

In 2013, the UK introduced a new program called Flood Re. This is a risk sharing pool for properties with extreme flood risk. The government offers flood protection to these extreme flood risk properties. All other properties receive flood protection from private insurance providers.

With the introduction of Flood Re, pricing for flood protection changed to a risk-based model. This change was made because the previous government set price was not sufficient to cover losses. Plus, the government set price did not encourage residents to invest in flood damage mitigation.

United States

Flood insurance in the United States is available through the government, similar to France. However, purchasing flood protection is mostly voluntary in the US. Residents who live in Special Flood Hazard Areas are required to purchase flood insurance if they hold mortgages on their properties.

The US government currently sets the price for flood coverage. However, the US is in the process of changing their pricing model to be risk-based.

Major challenges to this approach include the use of outdated flood maps by the US government. These outdated flood maps result in inaccurate pricing and insufficient premiums to cover losses.

Sources:

The financial management of flood risk, Insurance Bureau of Canada.
Making flood insurance for Canadian homeowners, Swiss Re and Institute for Catastrophic Loss Reduction.

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