DBRS Morningstar sounded the alarm for Canada’s P&C insurers in a recent commentary.
The rating firm warns that climate change could make some risks too costly to insure, particularly in property insurance.
“Canadian property and casualty insurers have demonstrated financial resilience in handling ever-increasing weather-related losses through effective risk management. However, as climate risk increases and severe weather events become more correlated around the world, insurance and reinsurance companies may opt to withdraw property insurance coverage in regions they deem too costly to insure, or they may avoid insuring certain risks altogether. As a result, the availability of insurance (i.e., insurability) can become a problem in the future,” the rating firm points out.
DBRS Morningstar says that reinsurers, which provide the key risk management tool used by Canadian P&C insurers, may raise the risk level. If reinsurers were to shun the Canadian market, this could have negative repercussions, the rating firm says, noting that Canada’s climate warming is twice the global average. “Canadian insurers may become more exposed to the effects of climate change than some of their peers,” it says.
The impact of rising property values
DBRS Morningstar also notes that insured losses are not being driven by climate change alone. The growth is also attributable to higher property values and changes in socio-economic activity, which includes where people choose to live and how well infrastructure adapts to more challenging climate conditions.
“The former effect is somewhat mitigated by using inflation-adjusted values […]. Nevertheless, inappropriate land and infrastructure planning decisions are likely contributing to higher insured losses, which is an issue that the Canadian government plans to address as part of its National Adaptation Strategy, to be finalized in the fall of 2022.”
DBRS Morningstar also believes that the Canadian data potentially underestimate insurance companies’ payouts on weather-related losses because it does not capture smaller events that cause less than $25 million in losses, “that are possibly more frequent as a consequence of climate change,” the rating firm says.
Average annual insured weather-related losses are growing at a much faster pace in Canada than globally, DBRS continues. “Swiss Re has reported that global weather-related losses have increased 1.5x to USD 65 billion per year in the last decade (2011-20) from USD 42 billion per year for the 2001-10 period. In Canada, those losses grew 3.5x over the same period, which is more than double the pace of the global increase,” it says, adding that the risk of wildfires increased 6.5 times.
Insurers aware of the risks
DBRS Morningstar also mentions in its report that broader climate-related disclosures are becoming more commonplace among Canadian insurers, in line with most of the developed world. The rating firm gives Intact Insurance, Desjardins Insurance, TD Insurance and The Co-operators asexamples. “We expect smaller insurers will follow suit as best practices start to emerge,” it says.