As climate change worsens and the world experiences an increasing number of extreme weather events, one Bay Street portfolio manager said it will likely present a longer term tailwind for property and casualty insurance companies rather than a disadvantage. 
 
“It might sound counterintuitive but we see climate change and climate risk of being long-term bullish for the insurers,” said Brian Madden, senior vice president and portfolio manager at Goodreid Investment Counsel, in an interview. 
 
“To the extent the risks are increasing, the premiums will be increasing,” he said. “So we're pretty comfortable in their ability to price for the risk and reserve accordingly. We actually see it as a tailwind longer term for the sector.” 
 
The insurance industry has been dealing with a sharp increase in bad weather and other catastrophic events since 2009, according to the Insurance Bureau of Canada.
 
One could look no further than British Columbia, which is in emergency repair and recovery mode from disastrous flooding, after suffering through widespread wildfires mere months ago in the summer. 
 
Craig Stewart, vice president of federal affairs at the Insurance Bureau of Canada, said property and casualty insurance payouts are almost five times compared to what they were before 2009. 
 
“Just 12 to 15 years ago, we were paying about $400 million annually in payouts and now we're now at about $2 billion per year,” said Stewart, in an interview. 
 
While the industry is getting better at modelling the risk of extreme weather events, particularly when it comes to flooding, the models still “aren’t good enough,” he said. 
 
Flooding is one of the most difficult issues for insurers to mitigate risk-wise since it’s widespread and there are many different “versions” of potential water damage depending on the geography of the land, he added.
 
“This B.C. event where we're seeing wildfires occur and then flooding soon afterwards … there's a correlation between soil compaction, lack of canopy cover, and then water running off quickly into streams — we haven't modelled that. That's unpredicted. That's something new,” Stewart said.
 
However, Madden believes that Intact Insurance, Canada’s largest property and casualty insurer, will continue to be able to adequately cover any increases in claims. 
 
“Intact, in particular — and this is not the case for the entirety of the property and casualty insurance market — but Intact is consistently operated with a combined ratio below 100. What that means is their premiums more than cover their underwriting losses and other operating and administrative expenses [such as] sales commission and call centres," Madden said.

"Typically, they’ve run in a 95 per cent operating ratio. Which means for every dollar in premiums that they collect, they pay out 95 cents in claims and operating costs."
 
Madden owns Intact both personally and in his firm’s funds. 
 
He acknowledged where risk pricing can be trickiest is in the auto insurance segment, since some jurisdictions are stricter than others and companies might have to apply for premium increases. 

CONSUMER IMPACT

“We're definitely seeing prices increase,” said Matt Hands, director of insurance at rate comparison website Ratehub.ca, in an interview.

But it’s not just the increase in the number of extreme weather events that’s causing premiums to go up, the rising cost of building materials is also a key factor. 
 
“COVID didn’t make things any easier with supply chain issues. But just in general, the cost of materials is increasing the replacement cost of homes," Hands said.

"And now, you have the issue of increased risk that insurance companies are taking on for the severe weather events. It's all going to be factored into their pricing. So, you've definitely seen the market correct itself and reflect those increased risks."
 
Flood insurance specifically, he said, is still in its infancy since water protection is a relatively new product that was borne out of the 2013 floods in Toronto and Calgary and therefore, many newer flood-related products are still being refined. 
 
His best advice to consumers is to do your research and understand the area you live in first. Especially when it comes to potential flooding, look at what type of property you have, the surrounding land and whether any water is running towards your house, Hands said. Then, shop around for the best price for the coverage you need. 
 
“It’s not just knowing the payout amount, it’s really understanding the fine print,” he said.