Ill-prepared and underinsured Canada warned of escalating mega-hurricane risk

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Disaster causing over $ 35 billion in claims would lead to systemic insurance industry failure

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Climate change is making hurricanes bigger and stronger, and it could soon push them further north. Yet Canadian owners, businesses and insurers are underestimating this growing risk, according to one of the world’s leading reinsurance companies.

Overall, the northern nation has proven to be one of the most climate-resilient countries in the world, having so far escaped the worst effects of natural weather disasters brought on by global warming, according to a report by Swiss Re AG. This includes hurricanes. Although they have grown increasingly fierce, they often dissipate before arriving in Canada.

But as the surface of the oceans warms, the frequency, duration and intensity of storms increase. This expands their reach and makes Canada, where only one or two tropical cyclones make landfall each year, more vulnerable, according to the Zurich-based company, which provides reinsurance to 15% of the country’s insurance industry.

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“You have an increased likelihood that hurricanes will make landfall further north and end up landing at higher latitudes than we’ve ever seen before,” said Monica Ningen, head of Swiss RE Canada, in an interview.

Damage caused to Halifax, Nova Scotia in 2019 by Hurricane Dorian.
Damage caused to Halifax, Nova Scotia in 2019 by Hurricane Dorian. Photo by Reuters / John Morris

The United States’ National Oceanic and Atmospheric Administration predicts another overactive hurricane season this year, but not as severe as last year, when named storms caused more than 400 deaths and $ 40 billion in damage and loss in North America.

Like many countries, Canada has a “protection gap” when it comes to hurricanes, Ningen said. Since 2003, more than a third of these storm-related losses were not covered by insurance. If the storms in Canada worsen, the gap will also widen.

Although homeowners in the Atlantic provinces currently pay around $ 1 billion per year in insurance premiums, covering all types of disasters, “any major hurricane hitting this region could be a multiple,” he said. she declared.

Swiss Re is particularly concerned that many insurers have stopped paying attention to the Atlantic Multidecadal Oscillation (AMO), a phenomenon in which ocean temperatures fluctuate up to 4 degrees Celsius (7.2 degrees Fahrenheit) every 25 to 40 years old. These changes have a major impact on the frequency of hurricanes in the Atlantic, and the current warm phase is not expected to end anytime soon, Ningen said.

Climate resilience

Canada ranks fifth for resilience to climate change out of 48 countries studied in the Swiss Re report. If global temperatures stay on their current track and increase by more than 2 degrees Celsius (3.6 degrees Fahrenheit) from now on 2050, that could reduce global GDP by 14 percentage points, according to the study. The economic impact on Canada, on the other hand, would probably be half that much.

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Yet Jerome Haegeli, chief economist at Swiss Re, warned that these costs “are likely non-linear, which means that inaction today will have more costs in the future.”

So far, Canada has fallen a bit behind when it comes to hurricane damage. A record 30 named storms formed over the Atlantic last year. Eleven made landfall in the United States, but only one – Teddy – arrived in Canada as a much weaker post-tropical cyclone.

On Thursday, the Canadian Hurricane Center said that despite forecasts of more storms in the Atlantic for this year, the number expected to reach Canada will likely remain unchanged.

The last official hurricane-sized storm to hit Canada was Igor in 2010. The most destructive was Juan in 2003, which caused more than $ 300 million in damage and $ 91 million in damage. insured losses in central Nova Scotia and Prince Edward Island.

Costly claims

To understand what could happen to Canada if Swiss Re’s concerns are justified, it helps to understand how expensive hurricanes can be.

Hurricane Andrew caused $ 15.5 billion in insured losses when it crossed Florida in 1992, rendering a dozen insurance companies insolvent. If the same storm had struck 25 years later, insured losses would have been between US $ 50 billion and US $ 60 billion due to increased development and population growth in the region, estimates Swiss Re.

By comparison, the costliest natural disaster in Canada to date was the Fort McMurray wildfire in 2016, which resulted in insured losses of approximately US $ 3.6 billion.

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Hurricane Dorian, one of the strongest Atlantic storms in history, roared across the Bahamas as a Category 5 storm in 2019, but had weakened to Category 1 by the time it hit Canada, causing just $ 186 million in damage to the country.

“You only get a limited number of close calls before our luck runs out,” Ningen said.

A 2021 report by Property and Casualty Insurance Compensation Corp., which examined the financial ‘tipping point’ of the Canadian insurance industry, found disaster causing over $ 35 billion in claims would lead to systemic failure of the sector.

Even with the greater frequency of hurricanes, this doomsday scenario is much more likely to result from a major earthquake in Vancouver or the Montreal-Ottawa corridor, PACICC CEO Alister Campbell said. Canadian insurers have increased reinsurance – insurance for insurers – by 71% over the past eight years, to about $ 29.5 billion, largely to protect against a catastrophic earthquake. This insurance also covers other natural disasters, including storms.

For this reason, Campbell says the industry is well protected. “It’s very difficult to see a storm cause failure in Canada,” said Campbell, because “it’s very difficult to imagine an insurer being exposed to storm losses as large as the losses would be. caused by the earthquake.

Preparing for the worst doesn’t come cheap, especially at a time when homeowners should try to exceed minimum building standards as material costs skyrocket, Ningen said. The greatest risk may be that adequate protection becomes too costly for many people and businesses.

“This is the biggest challenge,” she says. “We have to adapt before the risks become unaffordable.”

Bloomberg.com

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