Why extreme weather is igniting premiums in Canada and around the world

This article was written by Omar Mosleh and was published in the Toronto Star on September 3, 2023.

When the Sumas Prairie, a low-lying area formed from a drained lake, flooded and forced Marcel Ackermann and his family out of their home in Abbotsford, B.C., he said he was determined to muscle through it “hell or high water.”

One might say he’s been through both. Ackermann and his family were forced from their home for about five months in 2021 — along with thousands of others. His house was flooded with roughly two feet of water, while his barns saw about four feet. He ended up gutting his house and needed to replace many amenities, such as counters and cabinets.

“You gotta understand when you’re in a disaster like this, it’s not five minutes later and everything’s fixed,” said Ackermann, who makes his livelihood from a farm and welding business on the property that was flooded.

“I won’t be working for a year. I need to still pay bills … and we’re homeless now. Like, everything is gone.”

It’s a situation more and more Canadians are experiencing as they contend with the reality of living in a country where climate-related catastrophes are an annual theme. There’s a catalogue of cascading effects from increasingly common natural disasters that are being seen coast to coast, according to experts.

It’s creating more uncertainty in the insurance industry, apprehension among real-estate buyers and delays in construction and the issuance of building permits.

And it’s costing a lot more money.

“A decade ago, between 2001 and 2010, the insurance industry

was paying out on average about $675 million a year,” said Rob De Pruis, national director of consumer and industry relations for the Insurance Bureau of Canada (IBC).

“Over this past decade, that number has increased to over $2.3 billion dollars a year on average annually.”

In 2022, the total insured damage for severe weather events reached $3.1 billion, according to IBC. Unlike 2016, the highest loss year on record, where the Fort McMurray wildfire accounted for roughly 75 per cent of national losses, last year saw natural disasters taking a toll “from nearly every part of the country,” IBC said.

That’s likely to be the case again this year, with wildfires causing destruction from B.C. to Nova Scotia.

This inevitably trickles down to the consumer, and will lead to higher premiums for everyone, said Mary Kelly, a professor in finance and insurance at Wilfrid Laurier University.

“It’s not that huge storm or the wildfire in Kelowna that is directly affecting my premiums,” Kelly said. “But the insurance company knows that for everybody, they’ll have to retain more risk … that’s really how it impacts us.”

The flood in Abbotsford was caused by more than 500 millimetres of rain — the most the city had ever recorded in a month — which led to local rivers overflowing and several sections of dikes failing. It resulted in the evacuation of more than 1,100 properties, 3,300 people and caused an estimated $2 billion in damage.

While Ackermann believes the city should have given the evacuation order earlier, the flood didn’t come as a total surprise — the area sits on a lake that was drained about 100 years ago and saw significant flooding events in 1948, 1972, 1990 and 2007.

The frequency of floods in the area, as well as the city’s preparedness and response to them, has caused him to consider whether it’s worth staying.

“We’ll give it another three years to see what the government plans on doing to this area,” he said. “And we’ll take that risk.”

The flood was catastrophic, but in some ways, it was only the start of his frustrations. One of the greatest surprises was when he was refused by his bank for a small loan to help with the repairs.

Ackermann said he has paid off the mortgage on his home and owns another house, two barns, a welding business, a vegetable farm, machinery and 50 acres of land.

“They said we can’t even give you $100,000, we can’t give you $50,000, we can’t even give you $10,000. I was shocked,” Ackermann said. “None of this makes any sense. When you have (millions) worth of assets, and they won’t even lend you $10,000?”

He said he was never given a clear reason for why he was refused. But he heard several of his neighbours were in the same boat, and he suspects it’s because the bank has deemed him as living in a “high-risk area.”

“You might as well just say the whole world’s risky,” he said. “There’s earthquake fault-lines everywhere, there’s mountains, there’s trees and when it’s hot, they can burn. I mean, it’s getting to the point where they’re all just making excuses because they’re losing too much money.”

There is some truth to this, according to experts, specifically in how the insurance industry is responding to more frequent and destructive extreme weather events, which most scientists agree are being driven by climate change.

“Insurance companies have known that this is going to be an issue, but they really were sort of ignoring it for a while … They knew climate change was becoming a thing, but they really weren’t thinking about it seriously because they could off-load the risk onto other players,” Kelly said.

Until recently, it was relatively easy for Canadian insurance companies to transfer that risk to reinsurers, or what are essentially the insurance companies’ insurers, she said.

While Canada may seem like it’s literally and figuratively on fire, the losses have been minor compared to the hurricanes in Florida and the bush fires in Australia, Kelly said.

“That really changed last year when the reinsurers are basically saying ‘You know what, Canada? You’re becoming as risky as every other country in the world and we’re not willing to take on all this risk — you have to keep some of it,’ ” she said.

“That’s a really important change that I would say really woke up the Canadian insurance industry last year.”

The increasing frequency of extreme weather events is also having a knock-on effect on the real estate and construction industries, insiders say. Some people are wondering if it’s worth staying in areas such as Kelowna, where destructive wildfires have become a regular occurrence during summer.

The cost of home insurance, especially in high-risk areas, is increasingly a top-of-mind consideration when purchasing a property, said Tamara Stone, a real estate agent

with RE/MAX Kelowna.

“When I started 29 years ago we didn’t talk about insurance … now on every contract that we’re doing, we write in ‘subject to the buyer getting insurance,’ ” Stone said.

“It’s something that people do factor in — can I afford it with the interest rates? Can I afford it with insurance? It’s just another piece of the puzzle,” she added.

Some buyers won’t purchase a home if it backs onto a forested area, Stone said.

“There are definitely people who say ‘No I’d rather live in the centre of town or I’d rather live backing a vineyard or backing a golf course where there’s a bit of a fire protection built in,” she said.

It’s not a straight line between extreme weather events and the rising cost of losses. There are many factors, such as aging infrastructure, but also the fact that there are more people and communities in areas that are prone to fire and floods.

“That’s the other driver — we all have more stuff, and we’re all living closer together,” Kelly said. “So even a storm with the same intensity as 20 years ago is going to cause significantly more damage … We just have all these big bull’s eyes across Canada now.”

Insurance companies also know more about fire behaviour than ever before, with much more data available, which could be influencing their overall risk profiles, De Pruis said.

The cost to replace and rebuild properties is also going up, due to multiple factors including inflation, fluctuating interest rates, gaps in the supply chain and skilled labour. In some cases, there are also delays from municipalities in completing inspections and issuing building permits. This all puts pressure on insurance premiums, De Pruis said.

On top this, the country is increasingly seeing situations where it’s not just one house that needs to be rebuilt, but entire communities.

“The way insurers do business with mass climate-related events is going to have to change as an administrative model,” said Erik S. Knutsen, a professor at Queen’s University and an expert in insurance law.

“Because (for example) you don’t just have one guy with a fire loss in Fort McMurray,” he added. “You’ve got half a town.”

Knutsen said the courts are seeing an increase in disputes between insurance companies and policy holders.

“We are seeing an uptick in insurers, particularly on climate-related issues, having to take a more nuanced stance about whether or not they’re covering a loss … on the insurance end, I think we’re going to start to see insurers take a harder line on the litigation side,” he said.

The country is also seeing an increase in “concurrent causes” of a loss coming together, Knutsen said.

“So for example, if I have wind coverage, but not water coverage … and the wind blows my roof off, and then it rains and wrecks all my stuff. Am I covered? Or am I not covered? There are lots of these kinds of things where two or more causes are coming together in these weird weather events,” Knutsen said.

Earlier this summer, State Farm, the largest insurer in the United States, announced it would stop accepting applications for business and personal lines of property and casualty insurance, citing a challenging market, inflation and “rapidly growing catastrophe exposure.”

“We’re not seeing that type of reaction from insurance companies in Canada,” De Pruis said, but added “that may change in the future.”

Ackermann, in Abbotsford, has some advice for people who may find themselves in a similar situation as he did — don’t depend on your insurance company, because you may not get as much as you expect in a claim.

He also suggests reading between the lines — “there’s no better time than now to read the fine print and understand it 100 per cent,” he said.

As for him, his experience caused him to reflect on where he lives and if it’s the best place for him and his family going forward.

“I’ve been here my whole life. It’s not easy to just uproot … but how many years have I got left in my life? I think I might just uproot and choose an area that’s not surrounded by trees, that’s up high,” he said.

“Now I only have to worry about earthquakes.”