Capacity to pay claims in Canada has not been an issue in the past. “That is to say, catastrophe financing has been managed well. Nonetheless, there are limits to the industry’s capacity to manage sustained increases in the frequency and severity of catastrophic claims,” say authors of Catastrophe Financing: Implications for the Insurance Industry in Canada. The research report is from the Insurance Institute research paper and the CIP Society, which represents graduates of the Fellowship and Chartered Insurance Professional programs.
The report explores the lessons learned from the 2023 renewal season – noted as being “one of the toughest ever.” It looks at what an insurance catastrophe is, what is driving costs higher and what financing options are available. It also examines solvency and systemic risk, the role of regulation in Canada and resilience. It also looks at the industry’s advocacy for an earthquake liquidity backstop and at government reinsurance for high-risk residential flooding.
They say there are limits in the financial capacity of insurers to respond to very large catastrophes, making it important to formalize the government’s role – providing a liquidity backstop to address systemic risk. That said, they warn that inappropriate design of public reinsurance has the potential to displace current providers.
The paper advocates for the creation of partnerships with governments to prepare for an event in which losses may exceed the industry’s capacity to pay. It also recommends that senior management in most insurance companies spend more time addressing the growing importance and complexity of catastrophe financing and the broader implications for their companies.
“An appropriate reinsurance program may become more difficult to design and perhaps secure,” they write. “If needed, the insurance industry must be prepared to take action if the availability or affordability of reinsurance is threatened.”
Insurers have assumed more risk than in the past for wildfires and severe storms, thanks to higher retentions. “Catastrophic events can threaten the solvency of an insurance company,” they warn. “More than 500 insurance companies worldwide have become insolvent since 2000 and some have failed as a result of extreme events. Catastrophic finance is a critical tool for managing solvency risk from severe events.”
Significant investment is also needed in seismic and climate resilience for the insurance industry to manage catastrophic financing over the long term, they add. “If bold actions are not taken, current trends could lead to a crisis of insurance affordability and availability,” they write. “The insurance industry must integrate seismic and climate resilience in all aspects of its work.”
