Insurance in the era of climate change

Starting in the 2000s, the Actuaries Climate Index began to trend upward in Canada, reflecting the increasing probability of extreme weather events.¹ More recently, a single event resulted in massive insurance claims. The 2016 fires in Fort McMurray caused nearly $10 billion in damage, a third of which was insured. It was the country’s biggest ever payout.²

In all but two years between 1983 and 2008, annual losses resulting from natural disasters covered by homeowners’ policies remained under $500 million. Since 2010, Canadian insurers have generally paid out over $1 billion a year.³ The main cause of this sizeable increase? Water. Heavy rainfall and rising sea levels result in water damage that threatens many at-risk buildings. Another big reason for this sharp increase is aging infrastructure.⁴

What would happen in a major disaster? In a 2016 report, the C.D. Howe Institute concluded that a severe catastrophe causing over $30 billion in insurable losses would exceed the capacity of Canada’s insurance industry and the Property and Casualty Insurance Compensation Corporation to meet the claims.⁵ Governments also help cover the losses suffered by citizens in natural disasters. Highlighting their role in managing risks like flooding, the Insurance Bureau of Canada noted, “The limited insurability of flood risk in Canada places the burden for post-disaster reconstruction and recovery on homeowners and taxpayers who are funding disaster relief spending from federal, provincial and municipal governments.”⁶

Governments have implemented a range of initiatives. In 2019, the Quebec government created the General Financial Assistance Program Regarding Disasters, which is overseen by the Ministère de la Sécurité Publique. However, with its specific eligibility requirements and compensation caps, it remains a program of last resort. France also has an interesting scheme. Every citizen with car, home or business insurance pays an additional premium for government coverage of certain damage caused by natural disasters.⁷

In Quebec, various regimes have been developed to provide compensation for the adverse consequences of floods, which occur with increasing frequency. The Régime transitoire de gestion des zones inondables, des rives et du littoral is a temporary regime that amends the application of the Environment Quality Act⁸ in bodies of water. It regulates and requires municipal or ministerial authorization for certain activities of those who live or work in flood zones and littoral zones and on lakeshores and watercourse banks.⁹ This new regulatory scheme also aims to gradually reduce the impacts of agriculture to allow littoral ecosystems to recover.¹⁰ The government’s intention is to reduce the risk of flood damage associated with the construction or renovation of buildings in areas with a high likelihood of flooding.

The governments of Canada and Quebec have also implemented more general plans to mitigate the impacts of climate change. The federal government’s 2030 Emissions Reduction Plan is a roadmap for the Canadian economy to reduce emissions by 40 to 45% below 2005 levels by 2030.¹¹ At the provincial level, the 2030 Plan for a Green Economy lays the foundation for cutting Quebec’s greenhouse gas emissions by 37.5% compared with 1990 levels and achieving carbon neutrality by 2050.¹²

Other targeted measures can be expected over the coming years, such as:

• Public and private investments in projects that help fight climate change (renewable energy, businesses with a low environmental impact, agriculture, green spaces, preservation of natural areas, etc.).
• Incorporation of climate change considerations in the construction of new infrastructure and buildings. For example, losses can be reduced by adapting structures to resist natural forces. Note that two thirds of the homes in Canada were built over 35 years ago to now-outdated standards.¹³
• Consolidation of regional insurance providers to pool risk associated with major disasters. In some places, regional insurance plans have already been formed, such as the African Risk Capacity Group and the Caribbean Catastrophe Risk Insurance Facility.¹⁴ Such models help spread climate risk over time, since not all regions are impacted simultaneously.
• Review of insurance products and property insurance underwriting. Riders are now available to cover loss caused by certain natural disasters. Inspired by the dynamic pricing model used in life insurance, Edward P. Richards has suggested a similar model for coastal homes based on the useful life of the building and water level rise modelling.¹⁵

The effects of climate change are already being felt and will continue to have a major impact on Canadian insurance providers. Over time, more data will become available and forecasting their scope and implementing mitigating measures will become possible. We can expect the insurance industry to evolve to match the accelerating pace of environmental disruptions. 

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¹ See the Actuaries Climate Index website https://actuariesclimateindex.org/explore/component-graphs/.
² Hubert Roy, Feux de forêts : les leçons de Fort McMurray, Portail de l’assurance, July 2, 2020, online: https://portail-assurance.ca/article/feux-de-forets-les-lecons-de-fort-mcmurray/#:~:text=L%27assureur%20rappelle%20qu%27il,G%24%20%C3%A9taient%20des%20pertes%20assur%C3%A9es.
³ Marc Tison, “Bouleversement du climat… et des assurances,” La Presse, June 30, 2019, online: https://www.lapresse.ca/affaires/economie/2019-06-30/bouleversement-du-climat-et-des-assurances.
⁴ Paul Kovacs, Climate Risks: Implications for the Insurance Industry in Canada, Insurance Institute of Canada research report, 2020, p. ii.
⁵ Nicholas Le Pan, Fault Lines: Earthquakes, Insurance, and Systemic Financial Risk, Toronto, C.D. Howe Institute, 2016, p. 5, online: https://www.cdhowe.org/sites/default/files/2022-04/Commentary%20454_0.pdf.
⁶ Insurance Bureau of Canada, The financial management of flood risk, Montreal, 2015, p. 11, online: http://assets.ibc.ca/Documents/Natural%20Disasters/The_Financial_Management_of_Flood_Risk.pdf.
⁷ Flora Guillier, “French Insurance and Flood Risk: Assessing the Impact of Prevention Through the Rating of Action Programs for Flood Prevention,” International Journal of Disaster Risk Science, New York, Springer Publishing, September 18, 2017, pp. 284-285, online: https://link.springer.com/content/pdf/10.1007/s13753-017-0140-y.pdf.
⁸ CQLR c Q-2.
⁹ Gouvernement du Québec: https://www.quebec.ca/gouvernement/politiques-orientations/plan-de-protection-du-territoire-face-aux-inondations/gestion-rives-littoral-zones-inondables/regime-transitoire/a-propos [in French only].
¹⁰ See the explanatory document: Modifications apportées par le Règlement concernant la mise en œuvre provisoire des modifications apportées par le chapitre 7 des lois de 2021 en matière de gestion des risques liés aux inondations, Gouvernement du Québec, online: https://cdn-contenu.quebec.ca/cdn-contenu/adm/min/environnement/gestion-rives-littoral-zones-inondables/doc-explicatif-regime-transitoire.pdf [in French only].
¹¹ Government of Canada: https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/climate-plan-overview.html.
¹² Gouvernement du Québec: https://www.quebec.ca/en/government/policies-orientations/plan-green-economy.
¹³ Blair Feltmate and Jason Thistlethwaite, Climate Change Adaptation: A Priorities Plan for Canada, Toronto, Intact Insurance (Climate change Adaptation Project), 2011, p. 93, online: https://contensis.uwaterloo.ca/sites/courses-archive/1191/GEMCC-652-PLAN-674-topic48/media/documents/climate-change-adaptation-priorities-plan-for-canada.pdf.
¹⁴ Partha Dasgupta, The Economics of Biodiversity: The Dasgupta Review, London, 2021, p. 152, online: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/962785/The_Economics_of_Biodiversity_The_Dasgupta_Review_Full_Report.pdf.
¹⁵ Edward P. Richards, Applying Life Insurance Principles to Coastal Property Insurance to Incentivize Adaptation to Climate Change, Boston, Boston College Environmental Affairs Law Review, 2016, p. 427-462, online: https://digitalcommons.law.lsu.edu/cgi/viewcontent.cgi?article=1414&context=faculty_scholarship.