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Canadian P&C insurers will be able to manage wildfire-insured losses: DBRS Morningstar

9th June 2023 - Author: Kassandra Jimenez-Sanchez

Wildfire-insured losses will remain manageable for Canadian property and casualty (P&C) insurers but will add to extreme-weather concerns as they have been exposed to larger and more frequent weather-related losses, according to DBRS Morningstar.

“Although Canadian P&C insurers’ results are likely to come under pressure during Q2 and Q3 2023, as they bear the weight of an above-average wildfire season, we expect that insured losses will remain manageable for most companies,” said Marcos Alvarez, Global Head of Insurance.

According to the report, in the absence of any other major catastrophes during this time and based on current claims estimates, Canadian P&C insurers should be able to absorb these losses with negligible impact on their capitalization, remaining a profit and loss event for the industry.

DBRS Morningstar estimates that the aggregate insured losses of the ongoing wildfires in Alberta, Québec, and Atlantic Canada will be materially smaller than the record $4.3bn following the Fort McMurray wildfires in 2016.

“However,” Alvarez added, “we anticipate that the increase in extreme weather and natural catastrophe losses, together with a hard reinsurance market globally and relatively high inflation levels, will continue to pressure home insurance prices up in the near term.”

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Canadian P&C insurers have been exposed to larger and more frequent weather-related losses, which are driven not only by climate change but also by the rise of property values over time as well as changes in demographics and accumulation of insurable value in risk-prone zones.

DBRS Morningstar has found that total insured weather-related losses in Canada for the last four decades (adjusted by inflation) has increased significantly since 2009. This increase in wildfire losses will compound insurers’ concerns about natural catastrophes.

Despite suffering insured catastrophe losses of $3.1bn in 2022, which was the third most costly year on record, the Canadian P&C insurance industry reported a strong combined ratio well below 90% during the year.

Although there was a slight deterioration in underwriting results when compared to the prior year, Canadian insurers benefitted from an advantageous pricing environment, contributing to solid topline growth.

Additionally, their overall results were also positively affected by favourable prior year claims reserve developments following conservative loss estimates during the peak of the Covid-19 pandemic.

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