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Will catastrophic weather be the new normal?
The “new normal” of recurrent and severe weather events represents an unpleasant reality for both insurers and homeowners. Climate change-driven catastrophes will continue to plague Canada in 2024 and beyond and will have an outsized effect on insurance rates and availability. While there are signs of some relief in many areas of the country, those acknowledging a new reality will have an edge on controlling risk and obtaining rate relief.
The numbers are concerning: Worldwide losses from natural catastrophes amounted to CAD$382 billion during 2023. That figure doesn’t help Canadian homeowners, particularly those located in catastrophe-prone locations, who are facing sharp rate increases or struggling to find insurers willing to issue a policy.
Globally, there were 143 insured natural disasters in 2023, the most ever. That included 30 disasters with losses between CAD$1.3 billion and CAD$6.8 billion, compared with an average of 17 such catastrophes of similar proportions in the 10 previous years.
In Canada, the insured loss total surpassed CAD$4.1 billion for the second year running, one of the largest loss years in history. Even more shocking, there were more catastrophes in Canada during the summer of 2023 than there are in an average year.
Climate change has been identified as the culprit for
more frequent and destructive storms and wildfires. Severe convective storms accounted for CAD$87 billion in losses worldwide in 2023. In fact, insured losses from severe convective storms have risen an average of 8% each year since 2008.
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How to keep insurance costs in check through risk management
While finding adequate insurance for many homes will remain difficult, we expect market instability will level off throughout the rest of 2024.
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1. The Wall Street Journal, “U.S. Saw Record-Breaking Thunderstorm Damage in 2023,” January 9, 2024.
3. The Insurer, “CatIQ: Canada faced fourth-worst nat cat insured loss year in 2023,” January 8, 2024.
The changing nature of catastrophic weather events
The nature of catastrophes appears to be changing: Perils once considered moderate risks have led to millions in insured losses. Damaging convective storms with baseball-sized hail, unprecedented flooding, strong hurricanes and raging wildfires have proved devastating for many homeowners.
Canadian catastrophe losses made news in both 2022 and 2023, topping more than CAD$3 billion each year.
To improve insurability and reduce risk in the short-term, homeowners should consider the following:
Build resiliency against disasters.
Short of moving a home located in a catastrophe-prone area, it’s impossible to remove all exposure to disasters. However, investing in mitigating measures such as upgrading roofs and plumbing or installing sensors and non-combustible landscaping can reduce the risk of a claim. Underwriters may even require that some of these are implemented before they will issue a policy.
Determine if your property valuations are current.
Although many homeowners have taken steps in recent years to obtain accurate property valuations, it’s important to have the right valuation in an era of increased catastrophes. Inflation, along with rising construction costs, have made accurate valuations an essential part of insurance renewals. Know your policies’ full terms and conditions in order to understand limitations and exclusions.
Be open to shouldering more of the risk.
With climate change leading to less insurance availability, homeowners may need to increase their deductibles, or add additional policies such as overland water coverage or parametric insurance. For CAT-exposed homes in particular, homeowners may have more insurance options if they’re willing to pare down their homeowners’ policies and assume more risk.
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Cyber rates are projected to remain flat or decrease up to 10%
In addition to these enormous challenges, rebuilding and replacement costs for a home remain high; they’ve risen by nearly 25% since 2019, exceeding the rate of inflation. In addition, labour costs are elevated due to the skilled labour shortage, and the cost of key construction components — including masonry, concrete and equipment — has climbed in the past year.
2. Munich RE, “Record thunderstorm losses and deadly earthquakes: the natural disasters of 2023,” January 9, 2024.
Climate Change and Catastrophes Result in a 'New Normal' for Property Owners
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Will catastrophic weather be the new normal?
These disasters have contributed to escalating premiums for homeowners. Between the start of 2023 and 2024, average premiums for homeowners rose nearly 8%. Around the world, an increasing number of people are moving to flood-prone counties or areas with high wildfire risks.
The horrible weather events of 2022 led to sharp rate increases in 2023, and an influx of catastrophic storms in 2023 may result in continued rate increases. But reinsurers, often seen as a bellwether for the insurance industry, reported strong profits in 2023 due to higher rate hikes and tight terms, despite personal lines insurers suffering losses.
However, it only takes one cataclysmic storm or a string of powerful hurricanes to undermine today’s move toward rate stabilization.
An April 2024 downpour dropped as much as 254 millimetres of rain in the desert climate of the United Arab Emirates and Oman, causing widespread flooding. Experts identified climate change as the reason for the intensity of the storm.
Catastrophic Floods in the Desert
The light after the storm
Homeowners in non-CAT zones will likely see more moderate rate increases and greater availability of coverage options. Insurance for properties with exposure to catastrophic perils, however, are unlikely to experience the same relief. Rates will depend on factors including a property’s placement in a catastrophe zone, the type of construction involved, the year in which it was built and myriad other factors.
Underwriters will continue to pay close attention to insureds’ loss experience, valuation methodology and geographic footprint in determining premiums, and they’re more likely than ever before to request risk mitigation measures from water sensors and automatic shutoff valves to roof replacement and fire-resistant landscaping. Homeowners that actively try to reduce their property’s exposures will be more likely to reap rate rewards.
Consult your advisor before purchasing a new property.
It’s essential to understand the risks that a new home or planned construction can bring and whether the property will even be insurable in the standard market. Your broker may be able to point out ways to reduce exposures in a new build or prevent you from purchasing a potentially uninsurable property.
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1. Swiss Re Institute, “Natural disasters in 2023,“ March 26, 2024.
2. Swiss Re, “New record of 142 natural catastrophes accumulates to USD 108 billion insured losses in 2023,” March 26, 2024.
3. CatIQ, “Canadian Insured Losses from Catastrophic Events Exceed CAN $3 Billion in 2023,” January 8, 2024.
4. Swiss Re Institute, “Natural disasters in 2023,“ March 26, 2024.
5. Reuters, “What caused Dubai floods? Experts cite climate change, not cloud seeding,” April 18, 2024.
6. Cision Newswire, “Home Insurance Rates Increase 7.66% in Canada in 2024,” March 5, 2024.
7. CNBC, “Homeowners insurance rates skyrocketed in these 10 states — here’s how to lower your premiums,” February 21, 2024.
8. Statistics Canada, “Insights into the impact of extreme weather trends in Canada on homeowners insurance and profitability and consumers,” May 15, 2024.
9. Insurance Business Magazine, “What’s impacting home insurance costs in Canada? IBC cites certain drivers that continue to affect prices,” May 15, 2024.
10. On-Site Magazine, “Building construction prices continue to rise,” May 3, 2024.
11. Kansas City Star, ”The cost of these 5 construction materials grew the most in 2023,” January 2, 2024.
Insurers were on the hook for CAD$147 billion in damages from catastrophes in 2023, down from CAD$170 billion in 2022 but above the 10-year average of CAD$121 billion.
in damages from catastrophes in 2023
CAD$147 billion
Insurers were on the hook for
1
$108 billion
Insurers were on the hook for
U.S. insured property losses reached
which is an enormous amount but 43% lower from the $114 billion paid out in 2022 and 33% less than the $106 billion in losses in 2021.
$79.6
billion
in 2023
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topping more than CAD$3 billion each year
Canadian catastrophe losses made news in both 2022 and 2023,
in 2023