Insurers can weather fire, floods, but will premiums rise?

The insurance industry is well-positioned to handle the wave of natural disasters that have hit Canada in recent months, but how long and to what extent premiums will change as a result is anyone's guess.

On Monday, British insurance titan Lloyd's of London warned the industry it needs to raise premiums significantly or risk being financially wiped out by the increasing frequency of weather-related disasters.

"Rates should rise," CEO Richard Ward told an industry event after the insurer revealed it paid out almost $4 billion Canadian due to natural disasters in the first quarter. "Prices are dangerously low at present."

The comments came after the insurer's worst financial quarter since the hurricane-ravaged season of 2005, when Katrina, Rita and Wilma laid waste to large swathes of the southern United States.

"Clients may think they are getting a bargain ... but insurers who write unprofitable businesses are the first to collapse when disaster strikes," Ward said.

Though the costs will largely be contained domestically, in 2011 alone Lloyd's has been impacted by devastating floods in Australia, a massive earthquake in New Zealand and the 9.0 magnitude tremor and subsequent tsunami that rocked Japan on March 11.

In Canada, more than 100 wildfires are currently raging across central Alberta, devastating the town of Slave Lake and other municipalities. And Manitobans have been struggling to deal with the cresting Red and Assiniboine rivers for months. The province's latest best guess as to damages is $200 million.

Are Canadian insurers able to manage the current storm? Insurance experts say yes, with the caveat that we're still in the early days of assessing the true damage toll.

The vast majority of damage caused by Alberta's deadly fires will be covered, James Geuzebroek of the Insurance Bureau of Canada says. "The terrible fire of Slave Lake is covered," he said. "Every policy is different, but as a general rule, fire of any kind is covered."

'Prices are dangerously low at present' —Lloyd's CEO Richard Ward

That's small comfort to the hundreds of homeowners who've already seen their homes go up in flames. But from an insurance perspective, "insurers are financially healthy and well capitalized. There's not a risk of financial ruin," Geuzebroek said.

No mass hike expected

While the agency has heard anecdotal evidence that home insurance rates are rising across the country, he doesn't expect a mass hike to cover recent events.

That's because by and large, insurance pricing is forward-looking. "They do not recoup losses on events that have happened," he said. "They price based on what they expect will happen."

Mary Kelly is the chair of insurance at the Wilfrid Laurier School of Business in Waterloo, Ont.

"Insurers tend to set prices for a geographic region," she said.

So Ontario home insurance premiums, for example, will largely be set based on the risks that insurers see in Ontario moving forward — not what happened in the past in a neighbouring province, she said.

Indeed, "the global reinsurance market will likely have more of an impact on our premiums than losses we see in other provinces," she said. That's because insurers guard against gargantuan disasters like the ones in Japan by buying reinsurance against payouts.

The nature of Japan's insurance industry makes it so that much of the damage there will be repaired with funds from the Japanese government and local insurers — to the tune of somewhere between $30 billion and $50 billion US, most recent estimates expect.

Geuzebroek  agrees. "The really devastating disasters we've seen elsewhere won't directly affect insurance companies here in Canada," he said.

In terms of fire, the gold standard event was the horrific fires that swept through Kelowna, B.C., in 2003. They caused about $200 million in damage as roughly 240 homes, a large paper mill and some other facilities were destroyed. The Alberta wildfires of 2011 may have a similar final toll.

"It's hard to say, but it's looking like we're going to get there," Glenn McGillvray, the managing director of the Institute for Catastrophic Loss Reduction said. More than 95 per cent of those wildfire costs will be covered by insurance, as Canadian law stipulates than any home or business mortgagee must have fire insurance. "The values might be higher these days, but in the mast majority of cases where insurance is in place, fire is covered," he said.

Ultimately, he notes, the 2003 Kelowna fires did not have a material impact on rates. "In Kelowna, there was no negative pricing after that event" he said.

But the economic impact of Manitoba's floods isn't quite as clear. That's largely because unlike fire insurance, the type of flood insurance that would guard against an overflowing river doesn't exist, Geuzebroek and others say. Water damage from backed up sewers, a storm breaking a window and letting rain in, or a burst pipe in most cases is standard in most policies. But insurance against what's known as "overland flooding" is not offered by any company in Canada.

"This isn't going to be a large insured loss," McGillvray said. "It's going to be a large loss, probably out of government coffers, but not from an insurance standpoint."

What's certain, however, is that insurers are bracing for a new world where natural disasters are likely to become more frequent and more deadly. Kelly notes that aging global infrastructure, climate change and greater population density are likely to make damage and corresponding insurance payouts greater as we go forward.

"There's no need to panic just yet, we certainly just have cause for concern," Geuzebroek said.