The Decibel - How the L.A. wildfires could increase Canadian insurance rates

Episode Date: January 23, 2025

The wildfires in Los Angeles have caused massive devastation over the past two weeks and may end up being the most expensive natural disaster in U.S. history. That will likely increase insurance rates, not just in the United States, but also in Canada.Salman Farooqui writes for the Globe and Mail’s Report on Business. He explains why American disasters could affect Canadians’ insurance premiums, and how Canada’s insurance industry is adapting to record levels of extreme weather damage.You can find the Impact Centre for Climate Adaptation’s resources on reducing risks to your home from climate change events: https://www.intactcentreclimateadaptation.ca/Questions? Comments? Ideas? Email us at [e-mail]

The wildfires in Los Angeles are still burning. So far, they've left at least 28 people dead and damaged more than 14,000 structures. It's awful. It's devastating. I mean, it just feels like our whole life has been erased by burning flames. The damages and economic loss may end up as high as $250 to $275 billion, according to AccuWeather. It could turn out to be the most expensive natural disaster in U.S. history.

And it could have an impact on home insurance rates, not just in California, but here in Canada too. Salman Faroukhi is a journalist for the Globe and Mail's Report on Business. He's here to explain how natural disasters in the U.S. can affect insurance rates here in Canada. I'm Maena Karaman-Wilms and this is The Decibel from the Globe and Mail. Sal, thanks for joining us again. Thanks so much for having me. So we just talked about the cost of the damages of the LA fires and of course we've also had major natural disasters here

in Canada. So what kind of costs has Canada seen recently because of extreme weather? So 2024 has actually been the most expensive year on record for insurable losses in Canada. We had 8.5 billion dollars in insurable losses and that's smashing the previous record of 6 billion dollars that happened in 2016 and that kind of followed the Fort McMurray fires which were a super super destructive weather events But what we've seen in Canada this year is not only a major wildfire event and and Jasper But also widespread flooding and in particular a hailstorm that was particularly damaging and in Calgary

Okay, so when we talk about that eight point five billion dollar number, I mean, that's that's a big number But can you break it down for us? Like when we look at the specific natural disasters fire flood hailstorm as you mentioned I guess where does the cost come from? Yeah, so people often think of wildfires as maybe the most expensive event because it's just so destructive and disruptive to people's lives but floods and hailstorms can often be the most expensive because the amount of damage they cause is just so widespread. And so this year, actually, the most expensive event was the Calgary hailstorm.

And that cost $3 billion in insurable damages. And that compares to the Jasper wildfire, which I think we all saw was a really awful fire that really took out large parts of the town. That was only $1.1 billion in contrast. So really, the biggest event That was only $1.1 billion in contrast. So really the biggest event here was that hail storm. And we also saw some major flooding and storm events in Quebec City. The remnants of Hurricane Debbie cost about $2.7 billion in August. So we've

kind of seen a variety of different kinds of storms that are causing this kind of damage. I just want to clarify, we are talking about insurable losses here, as you said, off the top. So this isn't kind of the cost of all the damage, but this is what the insurance actually is looking at then here. Yeah, for sure. And then there can be a lot of other costs that come out of it. The costs for people rebuilding, moving locations, there's costs that aren't insured because oftentimes flood insurance does not cover the entire cost of the damage that you'll incur. So there definitely are other expenses involved here as well.

All right, so you mentioned 8.5 billion in insurance claims for 2024. That's the new record up from 6 billion, which was the old record in 2016. I guess I wonder if we're seeing a trend here, Sal. Like in recent years, are we seeing more insurance claims for these natural disasters compared to previous decades? Yeah, so in the decade between 2001 and 2010,

we saw that sort of the average insurable losses amount was $701 million per year. So we had damages in sort of the hundreds of millions of dollars. And what we're facing now is that in each year, we regularly see the insurable losses reach into the billions of dollars per year. And that is going to affect how insurance companies do business and the cost of accessing home insurance. So how does Canada compare to other countries when it comes to the cost of these insurance claims? Are we about average or where do we stand? Canada kind of used to account for 2% of global insurable losses.

This is according to the Insurance Bureau of Canada. And in recent years, we've seen Canada account for about 4%. So the amount of damage we're facing and the cost that we're facing in proportion to other countries is increasing. And of course, we started off talking about wildfires in the US. So where does the US stand? Yeah, so the US has been a very expensive place for insurance providers this year in particular.

If we look at just Hurricane Milton and Hurricane Helene alone last year, that was US $41 billion of insurance losses. And that accounts for roughly 29% of global losses in 2024. And that's not counting any other events that the U.S. had happen last year. So the U.S. is definitely a very expensive place to do business right now and insurance companies are taking note. Okay. So Canada is at 4% of that global number and the U.S. is at 29%.

So obviously here the U.S. accounts for a much larger part of insured damages. And it turns out Sal that we could actually be affected by this too up here in Canada. So how do natural disasters and their insurance claims in the US, how does that have an impact on us here in Canada? So to understand how that has an impact on us, first we have to understand this product called reinsurance. And reinsurance is kind of interesting.

It's basically an insurance policy that insurance providers themselves purchase for extremely damaging events, kind of events that are out of the ordinary and are going to cost them a lot of money to cover. This is like insurance for the insurance companies, then, essentially. That is literally what it is.

They provide insurance for the insurance companies just for when there are kind of unforeseen, really unusually large events. And the thing is, we're seeing a lot more of these kinds of unusually large events happening when I talk about the kind of hurricanes that happened last year in the US, the wildfires that we've seen cause so much damage. Those are the kinds of events that insurance companies rely on reinsurance for. And the thing is, with reinsurance becoming so much more of a part of an insurance company's

kind of business in the last few years in the US and Canada, that means insurance companies are facing higher premiums for their reinsurance. And Canada and its kind of own situation can be lumped into the situation that we're facing kind of in North America in general. And the floods, the wildfires that the US face are kind of the same issues that we face in Canada so as a result you know the Insurance Bureau of Canada the

organization that represents all insurance companies in Canada is kind of sounding alarm that insurance reinsurance premiums are going to increase. Okay so the IBC the Insurance Bureau of Canada they're saying that reinsurers are raising rates then for insurance companies. So does that get passed down to the consumer then? Like, will people see their insurance start to go up? Yeah, so what the IBC told me is that insurance companies try their best to keep that cost kind of to themselves and not pass it on to consumers.

And their kind of proof of that is that actually a couple of years ago, reinsurance premiums already increased by about 100% in Canada. And, you know, insurance companies at the time were trying to keep that cost to themselves. You know, it's a part of them being competitive and offering competitive rates as well. And kind of the industry at large expected reinsurance rates to maybe drop a little bit after such a large increase following the pandemic and following some some big weather events but now with with kind of more record years happening there is now a thought that reinsurance premiums could increase even more and you know after already increasing by so much there is you know a sense that that kind of premium increase can now be passed

on to consumers as well. So I guess a big question is, should Canadians expect to see their their home insurance costs go up in the near future? You know, depending on where you live, the answer from insurance analysts is yes, probably the places where we're most likely going to see insurance premiums go up is in Alberta, British Columbia and Quebec. These are kind of the provinces that face the most wildfires and the most flooding, the most damage from severe weather events.

And this is likely, if you're a homeowner with insurance, you're likely going to face increasing premiums, especially from these reinsurance costs in these regions. And I wonder, because we talked about how insurance costs are so much higher in this decade than they were in a previous decade, from 2000 to 2010. costs in these regions. And I wonder, because we talked about how insurance costs are so much higher in this decade than they were in a previous decade, from 2000 to 2010, have people in Canada

already seen their home insurance go up as a result of that? Yeah, I mean, in riskier parts of the country, insurance premiums are definitely steadily increasing. When I talked to the IBC, they said that in riskier parts of the country, some of the areas, some of the provinces I mentioned, especially in some of the areas where, you know, there's higher risk of flooding and higher risk of fire, they've seen their insurance

premiums increased by roughly five to 15% a year. So there is definitely an impact that homeowners are facing from the insurance side. We'll be back in a minute. I want to come back to the fires in LA for a second here, Sal, because some of the homes that burned there were actually not covered by insurance. And this is because they were essentially uninsurable because they were built in an area with a known high fire risk.

Could this happen here? Is there anywhere in Canada where you can't get home insurance for something like fires? Yeah. So what's going on in California in terms of homes being uninsurable is a little specific to some of the policies in that state. The state government over there tried to limit the increases on insurance prices that providers could place. And they did this in an effort to make sure that homeowners would be able to access insurance and they wouldn't be priced out of the market. But what has happened instead is some insurance companies

have just found that it's too risky to operate in the state, especially when they cannot increase premiums to a level where they can still operate as a business. And what has basically happened is a lot of insurance companies have just left the state and a lot of homes have become completely uninsurable because insurance companies don't want to touch them for the rates that they're required to offer to the consumer. So here in Canada, we don't have that kind of policy, at least on the home insurance side.

That's why in the near term, at least, people believe that home insurance is still going to be accessible to people in wildfire areas. There is a sense that as wildfires get worse, that that could change, especially as the cost just gets so high. And already, when it comes to flood insurance, which is a pretty new product, there's about 1.5 million households

that just aren't eligible for it at all. So there definitely is some issues around insurability in Canada, but not quite as bad as California. OK, so it's interesting to know that there's very specific policies in California then that made this an issue. You mentioned flood insurance, though.

This sounds like an interesting thing to dig into. How is flood insurance different than, let's say, fire insurance in Canada? Well, flood insurance in terms of water that could have come in through your basement or through sewage and that sort of thing, that has already existed. But in terms of flood insurance for massive rain events and flooding rivers and that sort of thing, that only became a product in Canada in the mid 2010s. How is that possible? Why wasn't that a product earlier? We must have had flooding before.

Yeah, I mean, flood insurance was just something that I think insurance companies didn't have a lot of data around, and it made it a difficult thing to price. So it just wasn't something that was really offered before. And so even now that it is offered, it kind of became a thing in the aftermath of these widespread floods that happened in Calgary. They were extremely damaging, and sort of the government

and the urge of the insurance industry to be able to offer this product to Canadians. The Calgary floods, I think that was what, 2013, something around there? Yes, the Calgary floods were in 2013. And in the aftermath of that, that is sort of when flood insurance became a product. And still, because insurance companies don't have a lot of data around this, the risk is quite high for them to cover this kind of damage. So what we find is in the most risky areas for homes kind of around rivers, places that often flood, floodplains, that sort of thing, insurance for this kind of flooding is either unavailable completely, extremely expensive, or it will only cover a small amount of damage.

So that's kind of a new program right now in the last few years. And the federal government is kind of working on a program where they can partner with insurance companies to ensure that every home can access some kind of flood insurance, especially because this is kind of one of the biggest concerns in terms of massive weather events in Canada

is the amount of flooding that's going on. But to this day, that's not something that's been implemented yet. So if natural disasters continue to cause more and more damage, as unfortunately we expect them to do, how do we avoid a scenario where houses either become uninsurable or insurance premiums just become so unaffordable for many homeowners? Yeah, so I think this is kind of a sticking point for the insurance industry. What they say is that they want homes in Canada to be more resilient to these kinds of weather events and the IBC points out that the government sort of in the last roughly 10 years has spent

about $40 billion on reducing carbon emissions, which is obviously very important. But in that same time span, they've only spent about $4 billion for making homes resilient in the forms of tax credits for renovations and that sort of thing. So what they want to see is kind of more proactivity from the government to get homes built in a way that is more resilient to floods and fires, because that can have a real impact on saving money for

both the government and for the insurance industry when big weather events do strike. Can we talk about some of the details there? Like what would that look like for the federal government to regulate things that would make homes more resilient essentially? Well we have seen sort of on the municipal level some homes say and wildfire prone areas have regulations for you know how homes have to be built, the kinds of materials they use, how far trees are from your property, and that sort of thing.

But I think really what the insurance industry likes to talk about is getting people to renovate their homes in a way that is more climate resilient. And I think the way this happens is through subsidies and that sort of thing to really get people to be proactive about how they build their home or how they renovate their home. And if we look at the federal government like I guess I wonder has there been any leadership at that level of government

to take any action on these kinds of measures? Yeah so the federal government has sort of talked in preliminary stages about implementing this flood insurance plan which is very important in terms of making sure that all households can actually access some form of flood insurance. I think the insurance industry has talked about how this is a good thing, but the steps are still very much in their early stages. And there's kind of not a clear idea of how much it's going to cost, how long it's going to take to implement, especially when we consider the fact that Parliament has been prorogued and there is a real sense that this liberal

government may not survive the next election. I guess I wonder Sal, is there a case on the other side of this, like is there maybe a situation where the government shouldn't step in, like if certain properties are really high risk of damage from a natural disaster, I mean maybe we shouldn't be building in that area, not encourage people to do that. I think that is definitely part of this conversation and it's a very emotional, very difficult topic for people who kind of live in these communities,

their whole lives are in these communities. It's really not an easy answer, you know, and I certainly don't know what the best way to deal with that is, because the reality is in Canada we have a lot of water and we have a lot of places that are built along areas that could flood. So the sheer amount of people that are at risk of this and would be required to move, if that was sort of something that we wanted to see them do, then that is definitely a

very difficult, very complicated conversation to have. Yeah. Just lastly here, Sal, if someone is worried about the risk to their home and they're, you know, also worried about their insurance possibly going up, is there anything that we can do on an individual level to mitigate those issues? Yeah, so this is actually a story that I'm writing about right now in terms of what options you have yourself to do renovations to either reduce your home insurance costs or just reduce the risk of destruction and sort of fully losing your home in one of these events.

And you know, so far I've been in research and kind of what kind of things reduce your home insurance premiums. Right now one of the main things is to have a sump pump installed and that is something that basically protects your home when the municipal water system backs up. And that is a clear way that your insurance premiums can be reduced because your home is sort of clearly better protected from flood damage. But then there's also other things you can do,

things that maybe might cost between $0 to $3,000 in terms of just ensuring your gutters are clean and making sure that your rain gutters are pointed a little further away from your foundation of your home, that there's adequate sloping so that water flows away from your home. You can even do things like make sure there's more green space in your yard, gardens, and even turning your driveway into a partially dirt or grassed driveway so that it can soak up more water. These kinds of things I'm not sure yet whether they'll actually affect your insurance premiums but they can

definitely relieve you from a lot of the pain of the kind of damage and the restoration that has to be done after one of these events happens. There's similar things you can do for wildfires. Those can get a little more expensive, up to $30,000. But there are things like replacing your shingles with fireproof shingles. And those can cost a similar amount as regular shingles. And they can also look quite similar.

And that can really protect your home in the case of a fire. And I think the things to change your home so it's more resilient to fire is particularly important, possibly, because of just the emotional part of losing your entire home. So I was talking to the Intact Center for Climate Adaptation. And they have a lot of good resources

for homeowners who are considering any of these changes to make their home a little more safe and a little more resilient to these wildfire and flood offensives. Great. So that's the intact center for climate adaptation. And we're going to link to that in the show notes so people can see it there.

Sal, it's so great to have you here. Thank you for doing this. Thanks so much for having me. I'm Maynika Ramon-Wilms. This episode was produced by Kevin Sexton. Our producers are Madeleine White, Michal Stein, and Allie Graham. David Crosby edits the show. Adrian Chung is our senior producer, and Matt Frainer is our managing editor. You can subscribe to The Globe and Mail at globeandmail.com slash subscribe. Thanks so much for listening.