Could wildfires wipe out Canadians’ access to home insurance? It’s complicated

Canadian homeowners facing wildfires, floods and other extreme weather events don't have to worry about companies pulling out of the country's home insurance market, experts say — at least not yet.

Rob de Pruis, national director of consumer and industry relations for the Insurance Bureau of Canada (IBC), says it’s “highly unlikely” that Canadian insurance companies will pull out of areas prone to extreme weather. In the U.S., insurance giants State Farm and Allstate recently pulled out of California’s home insurance market due to wildfires. But despite this year’s wildfire season, “the situation in Canada's not as dire as it is in California when it comes to wildfires,” according to de Pruis. “In California, wildfire is becoming more of a predictable, regular occurrence. In Canada, for most areas, it's still not as predictable.”

Canada is also less densely populated than the U.S., meaning wildfires here typically result in less structure damage compared to the U.S., said de Pruis. However, the 2016 wildfire in Fort McMurray, Alta., Canada’s most costly natural disaster in terms of insured losses, caused significant structure damage and destroyed 2,400 homes and businesses.

Jason Thistlethwaite, associate professor and co-lead of the Climate Risk Research Group at the University of Waterloo, agrees with de Pruis that it is unlikely Canadian companies will pull out of the home insurance market. However, that does not mean Canadians won’t feel the impacts of increasingly frequent extreme weather events on their home insurance.

Canadians are already seeing those impacts, “just not as comprehensively as in the U.S.,” according to Thistlethwaite. “There's already a lot of hazards in Canada that aren't insurable. The big example is the limited availability of overland flood insurance, Canada's most costly and common hazard. As climate change gets worse, you're going to start to see situations where the availability of insurance erodes.”

Currently, about 10 per cent of Canadians cannot get home insurance because they live in high-risk flood areas where home insurance is either unaffordable or unavailable, according to de Pruis. However, wildfire coverage is still affordable and available across the country at this time.

According to Thistlethwaite, this year’s wildfire season may lead to an increase in home insurance premiums in Canada, even in areas that weren’t directly impacted. However, de Pruis said it is too early to tell if this year’s wildfires caused enough damage to lead to higher insurance premiums.

For those who make claims for fire or flood damage, Thistlethwaite also says it’s unlikely they would be able to get coverage for the same incidents again. “Automatically, you're probably not going to get insurance for that again the following year, even if you invested in some type of mitigation measures,” said Thistlethwaite.

Thistlethwaite explained that insurance companies only consider risk when developing insurance models, not the efforts of individuals or communities to mitigate that risk. “A community could spend $10 million to build a new flood defence mechanism and that isn't necessarily going to be reflected in the insurance model. So you may have an issue where you don't have a lot of insurance coverage, despite the efforts of the local government to remedy that.”

A solution to rising insurance premiums and the threat of insurance companies scaling back their coverage is transparency and access to information for consumers, according to Thistlethwaite. “We need to level the playing field; insurers and governments have a lot of information about risk and consumers do not,” said Thistlethwaite.

IBC is currently working in collaboration with the Canadian government to develop a national flood insurance program to provide affordable overland flood insurance for Canadians who live in high-risk areas. Part of the program will involve developing an online flood portal where Canadians can input a residential address and see information on the flood risk for that home.

Thistlethwaite believes the national flood insurance program is a “good first step” but wants to see Canadians have access to risk data for all extreme weather events, either through data portals or regulations that make it mandatory for insurance companies to disclose risk profiles for a property to their clients. If they are aware of the risk of extreme weather events to their communities and homes, they can use the information to implement risk mitigation measures in their homes and demonstrate to insurance companies why their premiums should be lowered.

Thistlethwaite hopes that if Canadians can get access to data that shows where the highest-risk homes are, it will provide incentive for the federal government to supply more funding for the Disaster Mitigation Adaptation Fund, which invests in infrastructure projects to increase the climate resiliency of communities impacted by extreme weather events.

“About 75,000 homes in Canada are located in the highest risk areas,” said Thistlethwaite. “So that's the top one per cent, and they contribute to about 30 per cent of all the damage that we see across the country.”

The federal government, said Thistlethwaite, is the “insurer of last resort.” It has more resources to help communities in the aftermath of natural disasters and should also be putting money and resources towards preventive measures. If risk data were to become available, local governments could use this information to allocate funding and resources toward the most at-risk areas.

“It's like health care; instead of waiting for people to go to the hospital, we need to be doing things to [prevent that from happening],” said Thistlethwaite. “Same thing with disasters.”