Property insurance is an important part of the housing finance system and its health is tied to the health of the entire system. Having a well-designed property insurance system impacts achieving affordable and climate compatible and resilient housing.
The impacts also extend to providing stability to the housing finance system when catastrophic events occur. Industry subject matter experts identified the following 6 features as the most important elements to consider when developing a catastrophe risk insurance pool in Canada.
Role of government and private sector
- Across the pools analyzed in this research, the private sector provides insurance while the government developer supportive public policies
- The government may also develop partnerships with private reinsurance companies to lessen financial losses in years with significant climate events.
Relevant factors include:
- contracting requirements
- automatic processing capabilities
- level of bureaucracy
- associated decision-making timelines
New technologies such as robotic processing and Artificial Intelligence can help private insurers process claims faster.
- Catastrophe risk insurance pools can discourage development in disaster-prone areas through pricing signals.
- Monitoring performance indicators such as natural disaster mapping and climate change data can also mitigate risk exposure.
- Insurance premiums collected within a catastrophe risk insurance pool can also serve as a source of funding for government disaster risk mitigation investments.
- Premium and/or deductible discounts associated with resiliency measures can encourage greater uptake of disaster mitigation investment among policyholders.
- High take-up rates are key to ensuring the effectiveness of the pool.
- Insurance companies usually use the Law of Large Numbers to determine appropriate and stable premium rates.
- If a pool has low take-up rates, the Law of Large Numbers is not as applicable and risks are passed on to individuals and governments.
- With risk pooling, both low and high risks are insured, making average premiums more affordable.
- Risk pooling mechanisms can include automatic enrolment of natural catastrophe insurance within property insurance policies.