Quarterly Review | Spring 2024

By Glenn McGillivray, Managing Director, Institute for Catastrophic Loss Reduction and Adjunct Professor, Disaster and Emergency Management, York University

Canada is an interesting case in that it has become a country that has gone from one that occasionally experienced small, fairly easy to manage severe weather disasters to one that experiences large, costly, impactful disasters on a fairly regular basis.

In recent years it has become quite common for large loss events to occur in quick succession, even almost simultaneously, and this has been heavily taxing on those whose job it is to respond to help the recovery process. Governments at all levels and insurers (along with allied industries, like independent adjusters and disaster restoration contractors) are finding it increasingly challenging to operate in what has become a volatile environment. Now, it is common for homeowners hit by a severe weather event to be out of their homes for upwards of two years or more.

And climate change is playing a large role in this shift.

Many make the mistake of thinking that climate change is merely theoretical and is just a modelled phenomenon that may or may not begin at some far-off point. However, massive changes in our climate are already under way.

Globally, the ten hottest years on record have all occurred in the past decade, with 2023 being the warmest year since record-keeping began. Last year, the planet exceeded 1.5C of average warming for the first time. This is huge given the annual 20th century average temperature of the planet was 13.9C.

Here at home, Canada is warming at about two-times the global rate, and the Arctic is warming at about three times the global rate. This is for complex reasons that go beyond the scope of this article.

The impacts of climate change are many and varied, and range from such things as sea level rise, increased spread of forest pests (i.e. insects, like the mountain pine beetle), loss of ice cover, increased drought and extreme heat events, more vector-borne diseases (infections transmitted to humans and animals from blood-feeding insects), and melting permafrost to name but a few.

From a property and casualty insurance perspective (and in somewhat simplified terms) climate change means increased frequency and/or severity of severe weather events and wildfires. While climate change does not cause storms, floods and wildfires, it “loads the dice”, making such events more likely to occur. It has often been compared to a batter on steroids, with the same number of at bats resulting in more baseballs going over the wall.

Climate change means the atmosphere can hold more water vapour, which can mean heavier precipitation events in some places, but deeper, longer-lasting droughts in other places. From a wildfire perspective, Canada has already experienced a doubling in area burned since the 1970s, and is projected to experience a further doubling, possibly a tripling, of area burned by 2100. Fire seasons are also starting earlier and running later.

Extreme heat events, like the heat dome that impacted parts of BC in 2021 leading to 619 excess deaths , will also increase in many communities across the country.

There are many other, less understood, changes occurring in other peril areas, like wind and hail.

Climate change may also have other impacts on severe weather events, other than just on frequency and severity. These could include where things may happen (e.g. it is believed that Tornado Alley in the US is shifting to the northeast and, possibly, the southwest) and how things may happen (it is theorized that North Atlantic hurricanes may be forming faster and may be more slower moving and wetter).

All this means new and novel records being broken almost every year, or so it seems.

In recent years, Canada has experienced its worst wildfire season ever as measured by hectares burned (2023, 18.4m hectares); its costliest ever convective storm (ON/QC derecho 2022, $1b insured); its costliest ever loss event in Atlantic Canada (Fiona 2022, $800m+ insured); its deadliest heat event (BC 2021, 619 excess deaths); its costliest ever loss event in BC (atmospheric river 2021 $675m insured); its costliest ever wildfire (Fort McMurray 2016, $4b insured); and, its costliest flood (Southern Alberta 2013, $1.7b insured).

In 2023, a record 23 insured catastrophes were declared (i.e. events of $30m in claims or higher as per CatIQ - Catastrophe Indices and Quantification Inc.). The previous record was 15 events (2017 and 2022 were tied). July and August 2023 alone saw more declared catastrophes than Canada has previously seen in an entire year.

These changes and others are having profound impacts on Canadian property and casualty insurers.

By Parul Garg, Senior Analyst Strategic Projects and Products, Chubb Insurance

From powering our lights to starting our cars, a wide range of everyday activities rely on carbon-intensive fuels like oil, coal, and natural gas. In fact, these fuels contribute to more than 80 percent of the world's energy consumption. Surprisingly, pressing need to reduce carbon footprints has cast a spotlight on the insurance industry for curbing emissions. This article explores how the insurance industry, with its unique position and resources, holds the key to enabling businesses to accelerate their rate of decarbonization.

Carbon offsets aim to offset the negative consequences of carbon emissions. Carbon offsets have become increasingly popular as individuals seek ways to counterbalance their carbon emissions. These offsets can manifest as simple actions like walking to work or adopting a vegan lifestyle.

In the context of climate change, carbon emissions play a detrimental role, while carbon offsets take on a positive role. The year 2023 saw natural disasters with insured losses totaling USD 108 billion, including devastating wildfires caused by extreme heatwaves in Europe, Canada, and Hawaii. The rise in climate change-induced natural disasters is directly linked to the limitations of existing environmental sustainability strategies. To mitigate this, a systemic sustainable transformation centered on carbon offsets is crucial.

Lately, climate change has dramatically transformed the risk landscape for insurance industry, introducing a range of new risks. Primarily, physical risks resulting from increasingly extreme weather patterns and rising global temperatures pose significant threats to insurers by driving up the likelihood and severity of substantial claims. But that’s not all, insurance companies also face the challenge of transition risks, which revolve around the financial hazards involved in transitioning to a low greenhouse gas economy. In simpler words, changing risk landscape can be explained with the help of solar power installations on roof which is observed as a growing trend in countries targetting low-carbon initiatives. Such installations often become the most vulnerable part of a building and could easily be one of the drivers of the high losses inflicted by perils such as hailstorms.

Given the evolution of these complex risks, it is imperative for insurance companies to remain flexible and develop strategies to effectively confront the challenges posed by carbon heavy activities. As the demand for globally consistent measures to reduce carbon emissions intensifies, the insurance industry must work with global organizations to develop and adopt strategies to remain at the forefront of this transformation.

For instance, the World Bank convened multiple investors, including a hedge fund and a reinsurance company, to insure a Uruguayan electric-power company against drought, which would cripple hydroelectric production. In certain cases, it is also proving more effective to build and operate new alternative energy projects than to maintain existing conventional generational plants. The insurance sector should be leveraging such opportunities investing in the latest technologies and training throughout its value chain. This can be by investing in mitigation actions as a long-term investor or additionally catalyzing investment via underwriting climate-positive projects and sharing risk knowledge.

Mobilizing insurance sector investment requires government support in the form of policies that create incentives and lower investment barriers. The development of geothermal district heating (GeoDH) markets in various European countries is worth noting in this respect. Projections (from Geothermal DH Potential in Europe) suggest that by 2020, most EU nations would have at least one GeoDH installation. Geothermal District Heating (GeoDH) is decarbonization of heating, it is the use of geothermal energy to provide heat to buildings and industry through a distribution network. These developments from the European industry's highlights their commitment to decarbonizing the building stock and promoting sustainable energy solutions, which Canada could explore as well.

On the other hand, climate-related stress testing to implement innovative solutions seamlessly is still in its early stages and faces various methodological and capacity challenges. To overcome these hurdles, insurers may need to collaborate with climate specialists to develop appropriate stress tests, considering time horizons relevant to different business lines. Fortunately, global insurance companies have been and continue to geo-analyze their exposure by mapping them against evolving natural catastrophe risk for effectively monitoring and steering their portfolios. Over time, mapping catastrophe risks has become a necessity to effectively address heightened climate risks. To this extent, geo-spatial mapping by insurance companies set up a good foundation for climate related stress testing.

Insurers encounter hurdles in gathering emission data, assessing carbon footprint data, pricing climate risks, and transitioning investment portfolios towards sustainability. The insurance sector serves a diverse clientele, ranging from large corporations with established emission reporting standards to small businesses and individuals with limited emission data. Gathering emission data for personal lines insurance, particularly outside of vehicle insurance, proves challenging due to insufficient standardization and privacy concerns. Addressing these challenges requires a combination of standardized data collection protocols, standard categorizing of environmental risk, advanced modeling techniques, and informed decision-making that considers financial, risk, and regulatory factors. For insurance companies to successfully steer towards low carbon portfolios, this information gap needs to be narrowed. Regulators will continue to play a crucial role in implementing policies that mandate companies to report their climate-related financial information. There are startups specializing in real-time monitoring of carbon emissions and decarbonization platforms are currently assisting companies in their efforts to reduce their carbon footprints (Example Zeroe, Carbonzero).

The role of insurance providers in guiding their clients towards sustainability and incentivizing investment in adaption measures cannot be overlooked. It is their duty to help homeowners and developers better understand the nature and likelihood of risks they may face and advise them on adopting sustainable practices such as constructing greener homes, and facilities with superior insulation, need to incorporate protection measures during construction, and replacing conventional vehicles with electric vehicles.

Insurance companies can further foster sustainable practices by encouraging consumers to invest in risk prevention measures and incentivize via the means of transparent risk-based pricing by rewarding green attributes instead of traditional carbon attributes. Climate change-friendly guidelines for risk selection can also influence businesses to adopt more low-carbon practices. For instance, in 2023, Swiss Re extended the thermal coal policy to limit coal exposures in treaties across the property, engineering, casualty, credit and surety, and marine cargo lines of business. On the same line, Munich Re's target is to reduce emissions from financed thermal coal mining or power generation by 35% by 2025 (base year 2019), and to fully exit investments in thermal coal by 2040.

In the journey towards reduced carbon emissions and navigating a climate-sensitive world, the insurance industry encounters both opportunities and risks. Continuous innovation in products and solutions will be crucial in addressing these challenges. The industry can play a vital role by enhancing shoreline resilience, creating rain gardens and stormwater ponds, offering parametric solutions for adverse weather events, providing risk engineering services to reduce exposure to climate risk, and reinforcing structures to withstand climate disruptions.

Insurance companies have the potential to lead the way in carbon offsetting efforts. Given their influence across various sectors, insurers can guide their customers and themselves towards low carbon options. This makes them an important force in addressing the urgent need to reduce carbon emissions. By actively promoting a low carbon economy, insurers can effectively manage climate-related risks and safeguard individuals, properties, and the environment.