One reason why your insurance premiums are rising

Wednesday, August 1, 2012

Insurance industry losses due to natural and weather-related disasters are behind the increases we are seeing in insurance premiums. And insurers are concerned that warmer global climates may be one of the contributing factors

by HENRY HENGEVELD

In 2011, the premium for my property insurance increased by 17 per cent. Not one to make waves, I paid without complaint. However, when the invoice for my annual insurance premium that arrived in the mail this spring showed another large increase, I decided it was time to ask some questions. Why, I asked my agent, did the premiums increase by 35 per cent over two years when there had been no change in coverage and no claims. It's the weather, she replied!

Indeed, once I started to dig into insurance industry losses due to natural disaster claims in recent years, the supporting evidence was there. Furthermore, I tend to assume that my home insurance is primarily there to protect me from loss due to fire. The reality, I discovered, is that most catastrophic property losses that owners, governments and the insurance industry must deal with relate to damages due to floods and wind.  

Take 2011, for example. In his "Top 10 Weather Stories," Dave Phillips, Environment Canada's climate guru, notes a number of major events during the year that have resulted in the high cumulative insurance industry payouts. In fact, last year, the total related payouts were the second highest ever in Canada, exceeded only by those due to the infamous ice storm of 1998.  Statistics obtained from the Insurance Bureau of Canada add a few more related stories. These events include:  

A winter storm that hit Ontario and Quebec, with net losses estimated at $53 million.

A late April squall line in Ontario involving severe thunderstorms that caused some $222 million in property losses.

Large scale flooding in Manitoba during the spring and early summer that swamped three million hectares of farmland and forced 70 rural communities into states of emergency.

An out-of-control forest fire that swept through Slave Lake, Alta., in mid-May incinerating one-third of the homes and businesses in the town. The Insurance Bureau of Canada estimates net property losses of $742 million, of which about half was insured.

In southern Quebec, record-setting spring rains caused property losses due to flooding that approached an estimated $80 million.

Losses due to winds in thunderstorms crossing the Prairies in mid-July were estimated at almost $200 million.

Insurance statistics for the preceding year's losses are no more encouraging. The Insurance Bureau estimates property losses due to winds, hail and heavy rains from a severe weather squall line that passed over southern Ontario in early June, 2010, at about $127 million. The next month, fierce thunderstorms over southern Saskatchewan and, a week later, over the Calgary area cost Canadians an estimated $636 million in lost property. That fall, Hurricanes Igor and Tomas caused insured wind and flood damages in the Atlantic provinces that totalled some $165 million.  

The Insurance Bureau reports that net Canadian property losses due to weather events have now been near to or have exceeded the $1 billion per year mark for the last three consecutive years. Canadian losses, unfortunately, are only part of the story. To protect themselves from crippling losses from major catastrophes, insurance companies also pay premiums to international "re-insurance" companies.

Thus, for example, when the aggregate losses due to multiple claims from a single event exceed a critical threshold, the contract between insurer and re-insurer may allow the former to claim reimbursement for losses exceeding this threshold (much like the deductible on your personal policy). However, a large increase in losses due to major natural disasters that occur in countries far removed from Canada has forced these re-insurers to also increase the premiums charged to the smaller insurance companies.

In the final analysis, we all help to pay for the international mega-billion dollar disasters, such as the Japanese tsunami of 2011 and the flooding of New Orleans in 2005.

Needless to say, the insurance industry looks at the progressive rise in weather-related property losses, both within and outside of Canada, with some trepidation. Some of these increases, it agrees, are due to demographic factors such as greater wealth and hence value of property owned by clients and increased build-up of property in vulnerable flood zones.

However, industry representatives, including the Insurance Bureau of Canada and major re-insurers elsewhere, have over the past decade expressed increasing concern that warmer global climates have been causing – and will continue to cause – the incidences and severity of weather-related disasters, particularly severe winds and floods, to increase.

Likewise, while there is evidence to suggest hurricanes will become more frequent, related research has suggested that there is greater potential for increased intensity of hurricanes, including stronger peak winds and heavier rainfalls.  

If these bastions of global economics are concerned, perhaps we should be as well. BF

Henry Hengeveld is a retired climatologist.