Glenn McGillivray is managing director of the Institute for Catastrophic Loss Reduction
As dramas unfold in B.C.’s Okanagan and Northeastern Ontario as a result of a spate of rather severe wildfires, little is being said about the millions in taxpayer dollars being spent on suppressing these fires.
That’s because paying for wildland fires has largely become business as usual for governments, a no-brainer of sorts: fires burn, services are dispatched, the fires are put out and the bill goes to taxpayers, as if there can be no other way of handling these things. Indeed, it is not out of the ordinary for Canadian provinces and territories to dish out a total of $1-billion or more a year for the cost of fighting wildfires (last year, B.C. alone paid $561-million in suppression costs).
But anyone with a background in insurance, reinsurance, disaster-risk reduction and associated public policy knows better – just like the bean counters for the state of Oregon have known for the better part of 50 years. For about four decades, the state has been purchasing wildfire suppression expense coverage from the British insurance and reinsurance market Lloyd’s of London. Essentially for an annual premium (reported to be US$3.37-million for 2017) and after a US$50-million deductible, the coverage would provide an additional US$25-million for each occurrence to go against the state’s wildfire suppression costs.
While called a deductible, the US$50-million is better described as a self-insured retention. This is to say that the government would be responsible for the first US$50-million of suppression costs. Lloyd’s would then be responsible for the next US$25-million. This type of cover is known as stop-loss insurance, meaning the government’s wildfire fighting expenses would generally be capped at US$50-million, unless costs exceed US$75-million – a rarity in the state – at which time the government would again have to pay out of its taxpayer-funded coffers.
Such a stop loss cover provides two general benefits.
First, in the case of Oregon, the US$25-million for each occurrence in potential wildfire expenses is exchanged for a much smaller insurance premium. The cost is then shared with private timber lot owners, who can benefit from the policy if they help pay the premium and deductible (essentially kind of a user-pay idea). One payout on the policy (and it has paid out many times over the years) can replace several years of premium payments.
In the business of insurance, reinsurance agreements almost always tend to be in place for one year. But if these agreements are renewed year after year, over time, things will even out and both sides will benefit from the deal, the state during active wildfire seasons and reinsurers during normal or quiet years. In the case of Oregon, the state renewed the coverage in 2016 after three costly years for wildfire suppression, and even then, the US$3.5-million premium was US$300,000 lower than it was the year before. The 2017 premium was lower still.
The second benefit of an agreement such as the one between Oregon and Lloyd’s is that the volatility in the state’s wildfire fighting budget is largely removed (except in those exceptionally rare years when firefighting expenses exceed US$75-million). This allows the state to better plan and budget for a year as the insurance coverage essentially removes financial uncertainty by levelling out peaks and valleys (remember how Alberta’s NDP government slashed the province’s wildfire fighting budget for 2016, only to experience the worst wildfire in Alberta’s history that May?).
Interestingly, Alberta purchased basically the same type of coverage on a pilot basis from a block of Canadian reinsurers a number of years ago. The agreement was only in place for a year or two and proved to be quite advantageous to the province (and Alberta taxpayers). But after the policy paid out, it was discontinued, likely for political reasons.
But the opportunity to revive such a cover remains as Canadian and global reinsurers doing business in Canada have the expertise, the capital and the desire to make such coverage a reality, whether for Alberta, British Columbia, or any other Canadian province or territory, or at a federal level.
Think of it: Would you rather pay a reasonable insurance premium every year to protect your home or be faced with a $500,000 bill every couple of years to replace your dwelling and contents? The latter is basically what we are doing by using public coffers to pay for wildfire suppression.
There comes a time, usually after exceptionally destructive and disruptive natural disasters, when governments must step in to use their financial muscle to help society move quickly into recovery mode (such as after a very large earthquake). But the year-to-year expenses associated with such things as wildfire suppression can quite easily be shifted, at least in part, to those whose job is to manage risk and associated expenses, such as professional reinsurers.
Let’s take the burden off of taxpayers wherever and whenever it makes sense, such as with funding wildfire suppression.
We have done it before.