Canadian natural catastrophes being noted on the world stage

The impact of natural catastrophes is having an ever-increasing impact on the results of insurers around the world. According to a recent report from Aon Benfield’s catastophe model development arm, natural catastrophes caused roughly $7 billion in insured losses globally during the first quarter of 2014. Natural catastrophes are a problem internationally for insurers. Increasingly, Canadian catastrophes are impacting insurers’ results. It remains to be seen to what extent this will lead to an increase in pricing and/or a reduction in capacity.

Although Canada is large geographically, we tend to be overlooked on the world stage as a result of our relatively small economy compared to other international players. Representing roughly 4% of the combined economic clout of the entire G7, Canada is the group’s smallest member. Nevertheless, we have been noticed recently for our contribution to the worldwide results of the insurance industry. As much as it is nice to be noticed, getting noticed for having a disproportionate impact on global insurance results is never a good thing.

On March 26th, Swiss Re published a press release that summarised global insured losses from catastrophes. As noted in the Swiss Re study, ‘the single largest loss-event in North America was extensive flooding in the city of Calgary and surrounding area following six days of torrential rain. The economic loss was USD 4.7 billion and the insured loss was USD 1.9 billion.’

The same day that Swiss Re published its study, Lloyd’s released its financial results for calendar year 2013. Commenting on its reinsurance results, Lloyd’s stated that Canada had a record year for catastrophes. These catastrophes included flooding in Alberta and Toronto as well as a winter ice-storm. According to the report, ‘The net estimated claims of £120 million from the Alberta flooding made it the most costly event to the Lloyd’s market in 2013.’

Allianz Global Corporate & Specialty recently announced the top business risks for 2014. Natural catastrophes was listed as one of the top risks for Canadian companies. The company’s CEO and Chief Agent for Canada, Kevin Leong, remarked ‘It is no surprise that natural catastrophes continue to dominate the top spot in business risks for Canadian companies. The devastating floods in Alberta last June cost insurers $1.74 billion in damages, the Insurance Bureau of Canada has reported. And barely a month later, Toronto experienced unprecedented flooding resulting in insured losses of $940 million.’

Given the increased impact of natural catastrophes on the financial results of the property and casualty insurance industry, the recent launch of a new catastrophic loss index provider is timely. In a press release announcing the launch of this index, Glenn McGillivray, Managing Director of the Institute for Catastrophic Loss Reduction, noted that the ‘increasing level of catastrophe activity in Canada requires that insurers, reinsurers, (re)insurance intermediaries and others have access to a suite of dynamic tools that will allow them to get a better handle on the impact that these events can have on their individual operations’.

When it comes to natural disasters, any software that allows insurers to do a better job predicting the impact of future events is a welcome addition to the existing arsenal of predictive-modelling tools.

The debate as to whether the increase in natural catastrophes is the result of climate change that is itself brought about by the burning of fossil fuels is a debate that is hotly argued by both sides. Regardless of what is leading to the increased frequency and severity of natural events, the impact of these events on the underwriting results of Canadian insurers is very real. It is reasonable to assume that these natural catastrophes will causes insurers to take a hard look at both pricing and capacity in those parts of the country most affected by these types of events. Normally, in situations where there is a segment of the insured population that can be identified as being at higher risk, an option for an insurer is to cream the market by over-increasing the price and/or over-restricting capacity with respect to the high-risk population. When it comes to natural catastrophes, this is not a viable option because the areas most at risk for weather-related catastrophes (southern British Columbia, the southern prairies, southwestern Ontario, the St. Lawrence Valley, and the Atlantic provinces) account for the bulk of the Canadian population. As a practical matter, for a nation-wide insurer to price itself out of these markets is to price itself out of the whole market.