The Decibel - Why climate change is driving up the cost of your insurance

Episode Date: December 8, 2023

As storms become more frequent and more severe, insurance claims for damage to homes are piling up. Disaster claims in Canada have more than quadrupled over the past 15 years, accounting for more than $3-billion of insured losses in 2022 – up from just $400-million in 2008, according to the Insurance Bureau of Canada.Clare O’Hara is a journalist with The Globe’s Report on Business and she covers the insurance industry. She explains the relationship between climate change, insurance companies and your growing home insurance bill.Questions? Comments? Ideas? Email us at [e-mail]

On July 21st, Jeremy Beaton, who lives in West Hance, Nova Scotia, was at home watching what he thought was sort of a typical thunderstorm. His partner, Hilary St. Pierre, had just left that evening with their five-month-old daughter to travel to Ontario. Claire O'Hara is a journalist with the Globe's Report on Business. She covers the insurance industry in Canada. And he was updating her about how the storm was progressing. And around midnight his time, he realized that this was not your typical storm. The rain was just constant for four hours straight.

At about 2.30 in the morning, his fire alarm started to go off. And so he started to go down into the home and realized that something was wrong with the basement door. He opened up the basement door. And what he thought was initially something that was jamming the door, something that had been shifted or moved, it was actually water. And you said his fire alarm went off. I guess what happened when the water came into the basement? Right. So all of their electrical panel got destroyed when the water filled up because that's all kept down there. Their hot water tank had tipped over, their furnace.

And the doors eventually ended up bursting open and a lot of their belongings were swept away. Jeremy and Hillary's home is close to a riverbank, but about 15 feet above the river. And their basement is not below ground. It's at ground level. So we're talking about 20 to 22 feet of water that came up above the river. And their basement is not below ground. It's at ground level. So we're talking about 20 to 22 feet of water that came up above the river, flooded the basement. And when he looked out the window, his car was submerged halfway under in the driveway. When Jeremy told Hillary this, she wasn't too worried because she had recently upgraded their insurance policy after her sister's home burnt down in a wildfire earlier in the year.

So the next morning, Hillary called from Ontario, called her insurance company, notified them of the storm. And it was that morning she found out that the insurer said that her policy did not cover flood coverage. She was very confused. She pulled out her policy and she says, Nope, right here I have a $2 million policy that specifically states I have above ground water damage. The difference there is the insurance company was seeing this as a flash flood and that the water was surging from the bottom of the house and up into the basement.

And so they denied the claim. These kinds of storms are becoming more frequent and more severe because of climate change. And so are other natural disasters like wildfires and hurricanes. It's all having a huge impact on the insurance industry, in part because of how insurance companies are spreading out climate risk. And ultimately, this is costing homeowners more. So they've actually been about, right now, about $45,000 in damages that they've paid out of pocket. So this is all because of where the water came from, above ground versus a flash flood and coming from below them. Right. It's all about where the water came from.

I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Claire, thank you so much for being here today. Great. Thank you for having me. Okay, so we just heard about Jeremy Beaton and Hilary St. Pierre's experience off the top of the show, Claire. I guess, how common is that kind of story? Yeah. So what we're finding more is when it comes to flood coverage, this is a growing gap in insurance for Canadians. So when you call and you sign up for your first policy, fire is automatically embedded into that policy. But flood is not. And I think there's also a bit of an education gap there that many Canadians may not know to even ask for what the different

types of flood coverage is available to them. And we, of course, hear a lot about how climate change is causing more frequent storms, storms that are worse as well. I guess, how does this relate to all of that? Right. So over the last several years, what the insurance industry has started to see is the number of back-to-back storms is increasing. And we are seeing a surge in the number of claims that are coming in. So for example, in 2022, there was 3.1 billion of insured losses in Canada. And that compares to in 2008, there was 400 million. And so while 2022 is flagged as the third worst year for insured losses, the first and the second worst losses are really big catastrophes like the Fort McMurray wildfire in 2016 or the 2013 Alberta floods. There's very specific events where the insurance industry can look and say, that's why we had a surge in claims. In the last four to five years, this surmounting amount of claims that's coming in is all from a number of storms. So if we look globally of what's happening with the insurance companies, insured losses for this year, the first half of 2023, hit 50 billion

US dollars. And what's interesting about that is over the last decade, the average losses for the first six months of the year was usually around 32 billion. So we can see this year is much more excessive. As well, for this year, 16 of those disasters that we've seen globally have been more than a billion dollars each. And so that's really huge back to back events that the insurance industry has to pay out in claims. They don't have those four to five years in between them to make up and collect premiums to pay out something like a billion dollar disaster. Yeah. So it's not even just that there's more disasters, but that each one is, or a lot of

them are even more expensive. If you're saying they're over a billion each, those are really substantial. Right. And a lot of the claims that they're seeing are due to like storms where you have lightning, heavy rain, strong winds, hails, and that means it's water damage. So let's jump into this a little bit, Claire. I guess I want to break down really how the insurance industry works, because I think it's a little bit of a black box for a lot of people, honestly. So you need home insurance to get a mortgage for a property. So if you're a homeowner, you need home insurance. But generally speaking, what is covered when you get it?

Yeah. So typically in a home policy, you're getting covered for fire, for theft, damages. But when it comes to flood and water, that's going to be an add-on. So that's going to be an additional cost. It's going to add an add-on. So that's going to be an additional cost. It's going to add on to your premium. And there's also a number of different packages that insurance companies are offering when it comes to water. So how many homes in Canada then tend to have flood insurance? Right. So the interesting thing about flood coverage is about 10% of homes in Canada, like 1.5 million, they are uninsurable for flood risk.

Uninsurable. Uninsurable. So these are homes that cannot call around and price match. Insurers look at where they're living. They look at their postal code. They look at what's around their homes. And they cannot offer them insurance for flood. That means because basically they're too much at risk for flood that's more likely to happen.

So insurers say, no, thank you. We don't want to do this. Right. They're too much at risk. They may's more likely to happen. So insurers say, no, thank you. We don't want to do this. Right. They're too much at risk. They may have had it in the past and they've lost it. They may live in a neighborhood that's had back-to-back floods repeatedly, maybe a new home that's built in a floodplain. And this is a group of Canadians that we're going to see grow. In saying that, that leaves about 90% of homeowners who do have access to flood coverage.

But unfortunately, we only see about 40% to 60% of those who actually have signed up for that policy. Is that what you would expect to see? Like, is that a concerning number? I mean, it certainly is leaving a big gap of uninsured Canadians when it comes to flood. And there's a few reasons for that gap. I think one of them definitely is cost. Some of these policies are expensive, especially if you're living in a higher risk zone, if you're over in BC or in the Maritimes and you live on coastal water. If you're looking for coverage for hurricanes or like a tsunami where seawater comes in,

that is very rare coverage and it's very pricey. So cost is one factor is why we have that gap. The other big gap is that, as I pointed out, you don't need flood insurance to get a mortgage. You know, if that was a mandatory criteria, we would have the 90% number. We'd be hitting 90%. There's also just a very low public awareness. I think Hillary and Jeremy, I wouldn't say that they had low awareness. They were very aware of where they were moving to, but they were, like many, many Canadians, not educated that there's multiple packages, there's multiple add-ons, and there's very different, you know, fine print to those policies. Yeah. And so the fact that a number of Canadians don't have this coverage then, essentially they would be on the hook financially

for any damage that happens then. That's right. So I guess this really does come down to the money that people are ending up paying here, Claire. How is the price of home insurance then changing in light of the increased disaster claims that we're seeing? So as I pointed out, insurers are being very upfront and honest that this type of risk is growing. We've had industry executives saying that 10% of Canadians that don't have flood insurance, that's going to increase, that could double over 15 years. And so that means what they have to do is they have to sort of pass along some of that risk to homeowners. And that means, unfortunately, that home insurance prices

are going to increase. So over last year, what we saw was some of the bigger jumps in prices. So insurance premiums in Canada rose by 7.7%. But when you look at the different provinces, some of them were much higher. So Manitoba saw 13%, BC was 10.2%. And then you look at Nova Scotia also had a 12.1% increase. So clearly, those are provinces that are being hit a little bit harder than others, whereas Ontario had a 5.5%. And Saskatchewan, 6.6%. And saying that, that's still a big rate hike, 5% and 6%, especially in an environment where people are looking at where they can shave off cost. Okay. So it sounds like if disasters are happening more frequently,

insurance companies are having to pay out more, I guess insurance companies then are changing what they will cover as well in light of the increased claims. Like you're talking about this 10% of Canadians that are uninsurable for flood. I guess this is going to increase them. That's right. So when we talked about what was typically in your home insurance policy, if you go back 15 years, you know, all the natural disaster risks were all packaged in together. So you got your home insurance and water was included in that package. But what some insurers found is that for every dollar that they were getting in a

premium, they were paying out $1.15 in claims. And the main reason for that was water. So insurers who have been really monitoring, that's how they've been monitoring what's been happening with where their claim money is coming from, decided to change the way that that product worked. And they realized that they had to sort of carve out different products that would cover for different. And that's why you have flood coverage that is separate for seawater. That's very specific to countries that have tsunamis and hurricanes and different segments of water coverage. Wow, that's fascinating to hear that it was covered at one point, but it has been segmented out because it was costing so much. And we've been talking about water, but I'm also wondering now about wildfires, Claire, because we've seen so many in the last little while. Will homes that are in areas that have seen a lot of wildfires coming into Canada and analysts

were, that was where analysts started to report that that was going to impact the price of home insurance. What we wanted to know is whether any insurers would pull out of the Canadian market, because of the interesting thing about wildfires is the U.S. saw significant changes in their insurance market. Earlier this year in the United States, specifically in California, Florida, Louisiana, what we started to see is insurers couldn't take on as much risk. And these are states that have back-to-back natural catastrophes. Florida, we always hear about their hurricane that's getting hit. In California, they get hit with floods, mudslides, wildfires. And so two of the biggest insurers, Allstate and State Farm,

announced that they were no longer going to be offering new policies on homeowners. And it really rattled the industry because this was a significant change. And the reason for that is because in the United States, there's a price cap for insurance. So the government has put a cap on what homeowners can pay for insurance, and that means insurers can't pass on the cost of risk. insurance. So the government has put a cap on what homeowners can pay for insurance. And that means insurers can't pass on the cost of risk. So in Canada, me and other reporters certainly address the insurance market, asking them, are we at the same risk? Are we going to see some of the biggest insurers pull out and no longer offer fire coverage? And the answer we got is as of right now, no, that's not the case. And for two main reasons. One of the big things is the price cap that I just mentioned. The government in Canada doesn't have a similar mandate. So insurers are able to pass on that risk.

So people could just be paying more for their coverage. It can be expensive and it may still carve off some people who might not be able to afford it, but it's accessible. The second reason is when you look at a place like California, those wildfires that are coming into that, those wildfires that are hitting that state are coming back to the same areas. And in Canada, our landmass is much bigger and our return rate of wildfires is not always in the same area, and it's not always in city centres. So while we had a lot of coverage, we heard a lot about wildfires, it's still burning in a lot of areas that are not densely populated. And so the risk is lower. And so the insurers in Canada are saying this is very manageable for us. We're still able to cover and pay out those claims.

We'll be right back. Okay, so if insurance companies are having to pay out more for claims than Claire, and they're having to pay higher claims as well, how are these insurance companies managing all of that? So the insurance company, the way that they manage this risk and the increase in claims is very interesting. And it all comes down to a little slice of the industry that not many people know about. And it's called the reinsurance market. And reinsurers are huge global companies. And what they are, they're kind of the insurer to the insurance company. Okay. So insurance companies will have relationships similar to the way that we have a relationship

with our insurer for our car insurance. We might have another insurer for our home insurance, but we all have these relationships on how we get coverage for ourselves. The insurance company works the same way. So in order to be covered for natural catastrophes and these disasters, they have a relationship with a reinsurer and they'll go to the reinsurer and say, are you able to take a slice of my home insurance book and cover X amount? And they can have multiple relationships. They might have one relationship. But what it does is it's spreading the risk. So not one insurer is left holding the bill for a billion dollar catastrophe.

And one of the big reasons for what's happening right now in the industry is there was a big shift in the reinsurance market on the way that they were pricing their policies and contracts for the insurance market. Okay. And so when you say a big shift, like what are we talking about? Right. So several years ago, the reinsurance market realized, just like what we've been sort of talking about, that climate change was impacting the number of natural catastrophes that were hitting markets. So, you know, before they used to sort of spread the peanut butter across all the countries. You know, everyone had policies. It was pretty even. The risk was spread out for everyone. And several years ago, some countries were coming forward and saying, well, our risk isn't as high. Why are we paying so much? And so they had to do

a reset. And they started to look at places like California and Florida, British Columbia, and saying, those are higher risk areas. So we're going to have to renegotiate some of the contracts that we have for insurers in those countries. And at the beginning of January 2023, insurers found out that a lot of those contracts, a lot of their prices, the premiums that they pay to the reinsurers were going up from 20 to 25%, and in some cases as much as 100%. Okay, wow. Yeah, it was a massive blow to the industry. It was a very large spike. It wasn't something transitioned over time. And they had to react in order to be able to handle that risk. The second thing that

happened in the reinsurance market is they also asked insurance companies to take on more risk. And so similar to how we have a deductible in our car insurance or home insurance, so that means you would pay, if you have $500 deductible, you have to pay that first before an insurance will fix your car. And so the reinsurer said, we want you to take on a higher deductible. They have a different phrase for it, but it's a similar idea. And so the insurance companies now had to increase their deductible of what they would cover for a storm or an event before the reinsurer would kick in. And that happened in the same year. So sort of a double whammy. It sounds like so if insurance companies are having to pay 20%, 25% more to their reinsurer, I mean, that makes me wonder, does that get then eventually passed down

to a homeowner who's got insurance with that company? Right. As an insurer takes on more risk, and they also have to pay more to the reinsurer, that is going to trickle down to the homeowner. I mean, how sustainable is this, Claire? Like if the insurance industry is kind of looking at increased costs like in so exponentially here, if we're looking to a future with more intense storms and they're happening more frequently, like, yeah, how sustainable is this? It's a great question. And there's several angles to it. I mean, from the homeowner's perspective, if they go for the renewal and they're seeing the price increase, there are things that they can do, such as taking a higher deductible. It's not the greatest solution because you are going to have to pay more

in the event of a storm, but you can, and you can lower your coverage amount. How this is going to be sustainable for the insurance industry is a much bigger conversation that has to pull in the government and people like home builders and make it a much larger conversation. Because many of the insurance executives and the Insurance Bureau of Canada has said this cannot be solved with pricing alone. We cannot just continue to increase pricing because that's going to make a bigger insurance gap for Canadians if we just continue to price them out. So the insurance industry has said when it comes to the products, they can build the products and they can continue to offer flood coverage. But what needs to happen is things like not building in floodplains. OK, so it sounds like there is a significant role for government to play here. So when we're talking about kind of zoning, planning, no building on floodplains, like this is all

really important stuff for going forward here. Absolutely. And majority of the insurance industry is part of that conversation, because they want to make sure that they're not allowing for a bigger gap to occur. Let's talk a little bit more about homeowners. Are there things that people can do to help protect their properties from these climate-related disasters? Yeah, so one of the things we talk about when we're saying how sustainable is this, the insurance industry has been very upfront in the education aspect. And so they've started to put out more information around really small things you can do, like having hurricane clips in your roof, clearing debris away from your house for a fire.

There's hail-resistant roofing. There's siding material that can be fire-resistant. And up front, some of them sound expensive to homeowners. But if you're already putting an insurance claim through for something to be replaced, that's when you might want to consider these. So you've already experienced the flood and the fire, and you want to replace it and put in something that's a little more resistant, that can help you. Claire, I also want to ask you about renters, because we haven't talked about renters at all. But of course, they're also affected by natural disasters. So what kind of

insurance should renters really make sure they have? Yeah, it's an interesting question. As we all know, that's a huge part of the market where and a lot of renters as well could be found in basement apartments. So the big thing for renters is they should really be looking at what their content coverage is, and making sure that they do have that included in their policy. I think many landlords require renter's insurance when they sign up for their lease agreement because essentially any type of repair of the home is going to land on the homeowner. So if you're in a house or an apartment building, that type of damage and your renting isn't going to fall on your shoulders, but it is going to impact you if, you know, your entire basement floods and you're in a basement apartment and that's your whole life sitting down there in contents.

So you're definitely going to want to make sure of how much your policy is and how much your deductible is. Just lastly here, Claire, I guess we should come back to Jeremy and Hillary, who we talked about off the top. They did not get a payout from their insurer. Is there any recourse for them and people like them who wind up in similar situations? Yeah, it's a really upsetting story to hear. And they're not the only ones. We interviewed several people who didn't want to go on the record because either one, they were actually in the process of still fighting the insurance company for their claim.

And the other side of it is there's many of them who have decided to take legal action. And so these would be individuals that had a policy, but the wording of the policy. And a lot of it has to do around that above ground and the surface, water, overland, water, groundwater. There's sort of all this terminology. And a lot of the above ground policy said that it includes from a rainstorm. So many of the individuals we spoke to were impacted by that July 21st storm. That was a rain storm. And unfortunately, it made the rivers surge. So there's sort of two different events. So there is legal action that they can take.

With Hillary and Jeremy, they didn't take that route. They cancelled immediately with their current insurer and they shopped around and found a new policy that will protect them if this happens again. Claire, thank you so much for being here today and explaining all of this to me. Thank you for having me. That's it for today. I'm Maina Karaman-Wells. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show.

Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you next week.