Is risk insurance at risk?
Two years ago, Canadian property and casualty insurers – they’re the ones who insure our homes, buildings, and other properties against a variety of risks -- were making big bucks and were highly profitable according to the largest credit rating agency in the world, A.M. Best. How do we interpret this when we read the Insurance Bureau of Canada’s report that Canada exceeded $3 billion in insured damage from natural catastrophes and severe weather events like wildfires and flooding?
Such enormous incurred losses don’t necessarily mean that the $230 billion industry is losing money – it’s not. But there are signs that it’s getting worried. The P&C companies are not making what they used to, and even worse, they’re coming face to face with the realization that they’ve spent decades doing nothing to account for the massive challenges brought to all of us courtesy of disruptive technologies and climate change.
We can’t help but notice insurance premiums skyrocketing – up 400 percent since 2000. Even more disconcerting, we’re starting to see insurance companies getting out of the business of insuring. Desjardins Group was the last major lender to offer mortgages in higher-risk flood zones. In February it announced that it would no longer offer new mortgages for properties in “0-20 year” flood zones — where there’s a five percent chance of flooding in any given year. A non-profit organization in Quebec that has sponsored an annual agricultural fair for the last 30 years has just announced that it can’t find an insurance company to provide liability insurance.
This unsettling situation is finally leading to a serious rethink of how the industry can serve Canadians as well as secure its own long term sustainability. Hopefully, it will not take too long and hopefully, Canadians who need P&C insurance won’t be the only ones bearing the brunt of the dislocations. Here’s how procrastination got us into this mess.
To begin, collectively, we don’t dwell enough on mega-disaster probabilities. Like the estimated 40 percent of Canadians who live in areas classified as “moderate” or “high” risk; like the 30 percent chance of a significant earthquake in B.C. or the 15 percent risk of a major quake in the Quebec CityMontreal-Ottawa corridor; like another wildfire calamity like Fort McMurray that led to insurance payouts of $4.3 billion…no one’s talking about other risks like an electricity or communications grid failure.
Canada is the only developed country that doesn’t have a system that enables governments and financial regulators to backstop insurers faced with possible insolvency because of a megadisaster. A model could be taken from our banking system: the federal government created the Canada Deposit Insurance Corporation (CDIC) in 1967 to guarantee all bank deposits up to $100,000 in case of a bank failure. In Canada, the P&C business’ bailout scheme is an industry-funded corporation that is uncertain that it would survive a mega-disaster like an earthquake that could take out several insurers’ reserves.
Regulatory scrutiny and requirements are on the rise, and there have been many calls for the government and the industry to get together to strengthen stabilizing measures in the event of a major catastrophe. To date, efforts to create the equivalent of the CDIC have gone nowhere. Last year’s federal budget allocated $31 million to establish a low-cost flood insurance program aimed at households that don’t have access to adequate, affordable coverage – hasn’t happened yet. Meanwhile, insurance claims have been rising and P&C companies have been hiking premium prices. Or they’ve been exiting what they consider to be disaster prone areas. Either of these actions leave homeowners, businesses and even municipalities with few options for protecting their assets.
All the studies that have been done in the last many years suggest that the industry is still capable of covering disasters at levels with which we have become increasing familiar – namely insurance claims in the vicinity of $5 billion. PACICC, the industry-funded group that now backstops insurers that get into financial trouble, says that if insured losses ever reached $30 billion, many companies would become insolvent and a “majority of insurers would experience significant financial impairment.” PACICC goes on to say that its pool of funds was not designed to be the insurer of last resort.
An insurer of last resort is what we need. Fingers crossed that it is in place before it’s needed.