DBRS Morningstar estimates that the Canadian wildfire-related insured losses in Q3 will amount to between $700 million and $1.5 billion, but remain manageable for insurers, constituting an earnings event.
DBRS said that wildfires have been particularly widespread this year, affecting most Canadian provinces and burning through 14 million hectares of land, “greatly exceeding a typical year.”
The rating agency noted that it does not anticipate any direct credit ratings implications to arise from the existing wildfires, though, it said the “very challenging” season in Canada has the potential to further pressure Q3 2023 results of P&C insurers, especially if the fires affect densely populated regions, economic hubs, or critical infrastructure.
Nadja Dreff, Head of Canadian Insurance, commented, “While wildfires are not frequently the cause of large catastrophic losses, they have a potential to lead to high claims related to damage/total loss of property and equipment, smoke-related damage and other clean-up, cost of living expenses following mandated evacuations, and potentially for loss of income for insured businesses in the affected area.
“Larger and more frequent weather-related losses will continue to pressure property insurance prices higher in the near term.”
DBRS went on to explain that when a natural disaster is exceptionally large in scale, reinsurance covers a significant portion of the losses, sometimes reaching as high as 90% of claims for a particularly costly disaster.
However, in situations with numerous insured loss events, such as the case in 2023 with multiple fires burning across Canada, reinsurance-recoverable amounts tend to be lower.
DBRS continued, “This is because the insurer is usually accountable for covering initial losses until they reach a value high enough for reinsurance to take effect.
“As the fires approach urban areas requiring evacuations, insurers are actively engaged in assisting affected residents and processing incoming claims.”
However, despite the above-average wildfire season and other catastrophic events experienced in the first half of 2023, DBRS highlighted that Canadian insurers’ underwriting profitability has remained strong.
Canadian P&C insurers Intact Financial Corporation, Fairfax Financial Holdings, Definity Financial Corporation, and Trisura Group Ltd all reported underwriting profits for the quarter, with good combined ratios overall.
“The Companies have taken proactive steps to capture yield in the current higher interest rate environment. Overall investment income was good, driven in part by higher reinvestment yields and dividend income,” DBRS said.
The rating agency noted that these firms remain “well-capitalized” with regulatory capital ratios of their Canadian operations well above regulatory and internal targets as of June 30, 2023.
Victor Adesanya, Vice President, Insurance, commented, “Despite a wildfire season that has been more active than usual and the occurrence of other severe weather events across Canada, the four Canadian publicly traded P&C insurance companies reported positive net earnings for the second quarter of 2023 and for H1 2023.
“We expect premium rates to continue increasing in the short to medium term especially for property insurance as claims are being pressured by inflation, higher reinsurance costs, and elevated catastrophic insured losses. The Companies remain well-capitalized with regulatory capital positions well above supervisory targets.”