The Co-operators Approach to Flood Insurance
The Co-operators has more than $35 billion in assets under administration and two million people insured. Yet, the organization has humble beginnings. It was originally formed in 1945 by a group of farmers in Saskatchewan, Canada, who sought to protect themselves and their communities when traditional insurers would not provide needed coverage. This community-oriented ethos – and the organization’s co-operative structure – remain central today.
By the nature of its business, Canadian insurer, The Co-operators, is acutely aware of the impact of climate change. “The question is no longer preventing, but adapting to climate change,” says Bruce West, CPA, CA, executive vice president and chief financial officer. “So how can we better prepare our communities to deal with it?”
This question stood front and centre in 2013. That year, rainfall triggered the most catastrophic floods in Alberta’s history. Total damage estimates exceeded C$7 billion. And, Canada was the only G7 country not to provide homeowner insurance against overland flooding.
The Co-operators knew that climate change was likely to produce more extreme weather events, and wanted to be part of the solution.
Sustainability in the Boardroom
The Co-operators has strong commitment to sustainability from the CEO and the Board’s Sustainability and Citizenship Committee. Formed in 2007, this committee includes four of the 22 directors and the chair of the Board of Directors. This commitment provides a strong basis for climate change adaptation efforts.
The Co-operators was well positioned to proactively manage climate change risks and opportunities:
- They could create insurance products directly related to the damages caused by extreme weather events associated with climate change.
- Their business model as a co-operative enabled them to focus on addressing the unmet needs of their clients even when there were financial challenges to doing so.
Climate Change Adaptation Strategy in an Insurance Firm
Two main components of The Co-operators’ adaptation strategy were: a) creating new insurance products for Canadians and b) engaging with stakeholders to create more resilient communities.
Although The Co-operators had a flood initiative underway for several years, after the Alberta floods, they increased their efforts to complete the initiative.The Co-operators staff collected data from many sources, including other organizations around the world with experience of flood insurance. Then, they translated that knowledge to the Canadian environment. George Hardy, CPA, CA, vice president, Personal Lines and Underwriting, explained: “We took what is really engineering data associated with rainfall and river depth, as well as the climate impact on rivers, and translated that into a risk that is specific to the location of a house in Canada.”
Hardy described some of the product development challenges:
- Identifying and quantifying risk
- Developing an approach to pricing
- Estimating Return on Equity (ROE) and Return on Investment (ROI)
- Making the business case for the new product
Even as they developed the insurance product, The Co-operators sought to work with stakeholders in order to create more resilient communities.The Co-operators built a “pre-competitive space” in which to collaborate with other insurers, re-insurers, banks, developers, builders, government and non-governmental organizations to find a solution to the flood resiliency problem. As part of these efforts, they created Partners for Action, an initiative which now resides at the University of Waterloo.
Finally, in May 2015, The Co-operators unveiled “Comprehensive Water” as an option for Albertan home insurance customers, along with the slogan: “We can’t change the weather, but we can weather the changes.”
The Role of CPAs
Finance teams understand risk assessment, tax implications, capital planning, financial management and performance management: all critical concepts in business decision-making around climate change adaptation initiatives. Below, The Co-operators staff outline key accounting skills that they believe will help companies adapt to climate change:
- Providing context to quantitative analysis. CPAs could carry out data analysis and link this analysis to the context of a real business problems. For example, in some countries, governments and companies are trying to understand the ratio between dollars spent before and after extreme weather events. CPAs could help determine these calculations and assist with resource-allocation decisions.
- Understanding Environmental, Social, Governance (ESG) issues. CPAs could contribute more to adaptation if they had a deeper understanding of ESG issues, including climate change. “When I started my career 20 years ago, I had no idea I would be talking about climate change as a CFO and that it would be connected to what we are doing as part of our overall performance management of the organization,” said West.
- Managing new data. Hardy pointed to “the opportunity to take new data sets...along with the models that accountants are great at developing, and to use new capabilities with computing power….to take the quality of our decisions to another level.”
- Valuing natural capital. “Ten years ago, we did not realize that we should value our lakes, rivers and forests. The question is: how can an accountant bring that value of natural capital when planning a project that is, for example, manufacturing or mining?” said Barbara Turley-McIntyre, Vice President, Sustainability & Citizenship. Accountants can support the adoption of natural capital accounting in their organizations and ensure that natural capital externalities are reflected in data collection, decision-making, cost benefit analysis, risk management and reporting.
- Supporting and conducting stress testing and scenario analysis. Stress testing and capital adequacy requirements have evolved; understanding of business risks has increased. CPAs, with their actuarial counterparts, have traditionally run those tests to ensure organizations maintain minimum capital requirements to reflect their underlying risks. “Accountants could help apply these concepts to climate change risks,” said Rob Wesseling, executive vice president and chief operating officer, Property and Casualty Operations and The Sovereign General Insurance Company.
A Product to Serve & Protect – and Prepare – Citizens
What is particularly interesting about “Comprehensive Water” is that it encouraged and enabled thousands of Canadian citizens to create climate change adaptation strategies for their own homes and families. It protected them and helped them proactively prepare for extreme flooding. Other industries and countries will have very different versions of this story, but the moral is the same: The effects of climate change are already happening and it is time for us all to start adapting.
This resource is based on the Chartered Professional Accountants of Canada's climate change adaptation initiative, which is partly funded by Natural Resources Canada and managed by NBS.
Authors: Sakis Kotsantonis and NBS