Mission Creep

Over the last few years, Canadian property and casualty insurers have experienced unprecedented claims costs resulting from natural catastrophes. The Institute for Catastrophic Loss Reduction (ICLR) now considers large loss catastrophe years to be the new normal for Canadian p&c insurers.

Canadian carriers paid out $1 billion for each of the last four years and, in the case of 2011, significantly more than that. Even with the wildfire in Slave Lake, Alberta removed, insurers paid out $4 billion in natural catastrophe claims since 2009; with Slave Lake, the total is closer to $5 billion.

This is just the sum of those events that meet or exceed Property Claim Services (PCS) Canada’s $25-million claims threshold. Not included in the tally are many smaller events that fall under this minimum as well as those everyday, run-of-the-mill weather-related losses, which, at present, no single system captures.

ICLR estimates that severe weather costs for Canadian insurers now exceed $2 billion annually when losses from extreme events and smaller loss events are combined.

MAKINGS OF A TREND

When Canadian insurers experienced back-to-back, billion-dollar catastrophe loss years in 2009 and 2010 — the first time ever for consecutive billion-dollar losses in this country — many carriers began to ask, at least internally, whether this was the start of a trend or just a short-lived anomaly.

When considerably more than $1 billion was paid out in 2011 due to extreme weather and wildfires — another first for Canadian insurers, with three consecutive billion-dollar loss years — carriers began to reach outside their companies to ask if a new order was, indeed, taking shape.

With 2012 being the fourth consecutive year for billion-dollar, weather-related losses in Canada, ICLR has gone on record as saying that large losses are, indeed, the way it is going to be for the Canadian insurance industry going forward. The Institute does caution, however, that while it considers the trend toward larger weather-related losses to be the “new status quo,” this does not mean Canadian insurers will experience billion-dollar losses every year. Rather, there will continue to be good years and bad years for such losses, with large-loss years no longer being the rarities they were just a few years ago.

Only twice prior to 2009 did Canadian insurers pay out $1 billion or more in severe weather claims in a single year. The first was 1998 — the year of the Ontario/Quebec ice storm. The roughly $2 billion in claims tallied from that event make it the costliest insured natural catastrophe in the country’s history. The second was 2005, when $1 billion in claims were recorded, largely as a result of the August 19 rainfall event in the Greater Toronto Area.

TO WHAT DO WE OWE THIS DISPLEASURE?

So why billion-dollar losses, and why now? On the surface, it may appear as though the trend toward more expensive catastrophe years for Canadian insurers “just happened.” However, analysis of available data shows that insured losses from severe weather have been moving in a steady upward direction for more than four decades and have been on course to exceed the “magic number” of $1 billion for some time.

ICLR is of the view that this drive to $1 billion can largely be attributed to “creep” in three key areas: growth in concentration of values, particularly in Canada’s largest cities; degradation of the country’s infrastructure; and more large storms.

While none of these areas are a direct cause of natural catastrophes, all three work in one way or another — and often in tandem — to worsen the impact of such events when they do happen.

None of the changes in these three factors happened overnight; they changed over time and in increments (or crept) in such a way that when comingled with extreme weather and wildfire, ensure that large losses are now the norm.

Additional exacerbating factors that are making extreme weather events more expensive in Canada include the following:

• the rising cost of basement flooding as homeowners finish lower levels of houses more lavishly (with laminate or hardwood floors, drywalled walls and ceilings, pot lights, expensive furniture and electronics, and high-efficiency furnaces, to name just a few examples);

• building in dangerous places such as on coastlines and in the Wildland Urban Interface (WUI); and

• weak public policy measures for building codes, land-use planning and municipal bylaws.

None of the aforementioned — values, infrastructure, climate or the array of exacerbating factors — are likely to change for the better in any meaningful way anytime soon. As such, the drive to larger and larger loss years for Canadian insurers is expected to continue.

WHAT CAN INSURERS DO?

The mistake would be to view natural disasters as inevitable, wringing our collective hands as an industry, and do nothing more than pull out the corporate chequebooks a little more often. However, as ICLR strongly maintains, “natural hazards needn’t be disasters.”

For more than 15 years, the Institute has been working on behalf of Canada’s p&c industry to identify actions that could lessen the adverse impact of natural hazards on life and property.

Established by Canada’s insurers at Western University, ICLR provides a forum for leaders in the disaster safety research community to work directly with insurance leaders to better understand the factors contributing to the alarming trend of increasing damage due to natural hazards, and to advance actions to build resilience to disasters.

The Institute has been working on four main peril areas — wind, water, wildfire and earthquake — using four main yardsticks to measure success: quality research; effective partnerships; industry education; and consumer awareness.

In early 2012, ICLR’s Board of Directors requested an action plan to guide the research and outreach efforts for the next three to five years. Written by ICLR’s Insurance Advisory Committee, the plan outlines specific actions for reducing the risk of loss from the four main peril areas.

The plan for each of the four hazards includes a comprehensive review of potential actions, including the importance of increased investment in public infrastructure; working with municipal officials to change local bylaws and planning; influencing new home design and construction; and building public awareness of actions to reduce the risk of loss.

In line with that review, three critical elements of the new research to action plan are as follows:

• partner with municipalities to advance homeowner basement flood risk reduction efforts;

• promote best practices to enhance the resilience of existing homes to damage from water, wind, earthquake and wildfire; and

• work with builders to champion resilient design and construction of new homes.

Beyond continued support of ICLR’s loss reduction research program, Canada’s p&c insurers can leverage available resources and tools, including ICLR’s new basement flood mitigation website at www.basementfloodreduction.com; the Institute’s “how to” and information videos on its YouTube channel; and its “Protect Yourself” series of booklets.

ICLR’s way forward is ambitious, but critical to confront the “new normal” of large losses taking hold in Canada, through research to identify best practices for loss reduction. Most loss and damage is preventable if emerging findings are applied.