This summer proved to be the costliest season for natural disasters in Canadian history, with more than $7 billion in catastrophic losses resulting from four severe weather events.
It began in July when a once-in-a-century downpour left much of Toronto underwater and was followed in August by floods in Quebec, a wildfire in Jasper, Alta., and a hailstorm in Calgary that broke windshields, flooded streets and clobbered houses, and by itself ranks as the second-costliest disaster in the country’s history.
Insurance companies say that an uptick in the frequency and severity of extreme weather events — also known as climate change — is already making insurance more expensive for consumers, and this will only worsen with time.
Here are five ways to understand what’s happening.
Pooled risk
Insurance is based on pooled risk. For example, if a house burns down, the insurance premium payments made by that one homeowner won’t cover the cost of replacing that house. But insurance companies can afford to replace homes because everyone buys insurance, and the collective value of their payments covers the cost of replacing an individual home.
Another way to put it is that insurance companies pool the risks and spread them around. The premiums that everyone pays are calculated based on the level of risks that insurance companies expect.
But as more extreme weather events occur — hurricanes, hailstorms, atmospheric rivers, wildfires, etc. — people are filing more claims with their insurance companies. In turn, the companies are paying out more, so everyone ends up paying higher premiums.
It’s a trend that is likely to persist in the coming years, according to Aaron Sutherland, vice-president of the Western and Pacific region for the Insurance Bureau of Canada, a trade group for the sector.
A Calgary resident looks at the destroyed windshield on his vehicle after a massive hailstorm pummelled the city on Aug. 5. 2024, damaging cars and homes.
All hail the storm
This summer made it clear that both the frequency and severity of extreme weather events are rising.
Sutherland said the Aug. 5 hailstorm in Calgary was the “second-costliest disaster in Canadian history” and affected one in every five homes and 70,000 vehicles in the city. Photos show hailstones the size of eggs smashing through windshields and houses.
In total, there were 130,000 claims and about $2.8 billion in damage, he said. That’s about 41 per cent of the claims Alberta insurers usually see in an entire year, based on the five-year average.
Sutherland described it as an astounding amount of damage to occur “in one day, in one city.”
As a catastrophic event, it was second only to the 2016 Fort McMurray, Alta., fire that destroyed 2,000 homes and displaced 88,000 people. But it also came close on the heels of the wildfire in Jasper, Alta., in late July that burned 33,000 hectares and caused $900 million in damages, Sutherland said.
“It is unequivocal that we are seeing more severe and more extreme weather events and the costs of those are growing dramatically,” he said.
Spreading things around
If the risk was only rising in one isolated area, then the costs would be contained, but there has been a growing number of extreme weather events across the country.
Catastrophic losses reached $3.4 billion and $3.1 billion in 2022 and 2023, respectively, which puts them among the top 10 in the country’s history, according to a Statistics Canada report in May on the impact of weather-related events.
The Insurance Bureau of Canada said the amount of insured losses caused by severe weather events has risen in the past decade.
Between 2011 and 2020, there were on average $2.3 billion in insured losses caused by severe weather events. This was up 340 per cent from 2001 to 2010, when the average was $675 million per year. Even that number was up 150 per cent compared to the average of $475 million recorded between 1983 and 2000.
Sutherland said those numbers are all adjusted for inflation, calling it a new weather reality.
“This is simply part of a growing trend that is adding a lot of costs in terms of insurance claims and putting pressure on insurance premiums,” he said.
Statistics Canada said that what sets recent years apart is how a series of smaller events have created dramatic costs.
“Unlike previous years, when one bad event caused a significant uptick in claims costs, recently, several slightly smaller events that aggregate to billions of dollars are occurring,” the agency’s report said.
It was ice storms for Ontario, Quebec and the Atlantic provinces, while Alberta, British Columbia and the territories had hot, dry weather that caused forest fires in 2023.
The report said these costs have already been passed on to both consumers, who pay higher insurance premiums, and insurance companies, which are paying higher reinsurance premiums. Reinsurance allows insurance companies to pool their own risk.
Insurers’ costs could rise 50 per cent
“Our perspective is that the cost of natural disasters over 15 years — that’s the horizon over which we work — will increase by about 50 per cent and so our perspective is you can easily price for that,” said Charles Brindamour, chief executive of insurer Intact Financial.
Climate change is now so important to the insurance sector that CEOs regularly face questions about it.
In May, Charles Brindamour, chief executive of Intact Financial Corp., sat down for a virtual fireside chat with CIBC Capital Markets analyst Paul Holden, whose first question focused on climate change.
Holden said catastrophic losses for the insurance industry are climbing at a rate of 10 per cent per year, which is deterring some investors, so he wondered how this affects Intact’s bottom line.
Brindamour said Intact, like all insurance companies, is in the business of de-risking, but he took the position that climate change is a “growth opportunity.”
Natural disasters have increased by a factor of four during the past 30 years, he said. But he added that about a decade ago, Intact “transformed” its operations to collect new data and price policies differently to account for this change.
Home insurance is the most sensitive to extreme weather events, and he said the rule of thumb is that for every dollar of premium, an insurance company expects 10 cents in natural disaster-related damages.
“Now, what we’ve done is we’ve asked ourselves coming out of last summer, what if the world warms up between three to five degrees as opposed to the two-ish degrees that the world is shooting for?” Brindamour said. “And our perspective is that the cost of natural disasters over 15 years — that’s the horizon over which we work — will increase by about 50 per cent and so our perspective is you can easily price for that.”
His conclusion is that severe weather-related events will continue to cause insurance prices to rise, which he described as a growth opportunity.
But Brindamour added that severe weather events also cause a lot of losses that aren’t insured, and that’s going to be a bigger cost for the economy in the future.
“For every dollar insured, there’s $3 uninsured,” he said, “and I think it is a problem that all of society should tackle.”
Time to adapt
To some in the industry, the problem presents itself differently, and the impacts of climate change may not accrue to the industry’s bottom line.
“In the traditional approach, you either rate for the challenge or you pull out of the market,” said Michelle Laidlaw, associate vice-president of national product portfolio at Co-operators Group Ltd., one of the largest insurers in Canada.
That’s what happened to some insurers in the United States, including parts of California prone to wildfires and parts of Florida prone to flooding. In Montreal, after the floods of early August, there are questions about whether insurers could limit their coverage at some point in the future.
But Laidlaw said that is going to mean rising premiums and fewer coverage areas, which lead to what she calls the affordability and availability gap. As more extreme weather events take place, premiums continue rising and the gap opens more.
“We think of it as an adaptation strategy more than a growth opportunity,” Laidlaw said, “because if we do nothing, the problem will get worse.”
To that end, her company and others have started talking and doing more to prevent climate change and build resilience into the system.
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