After bad year, insurers face potential ice-storm hit

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Canadian insurers are grappling with the prospect of financial damage from yet another severe storm, capping off a brutal year that raised serious questions about how the industry will deal with the costs of climate change.

After suffering a $3-billion hit from natural disasters such as the summer floods in Alberta and the Greater Toronto Area, property and casualty insurers are now racking up claims from the ice storm that hit Ontario, Quebec and Atlantic Canada. It is still too early to determine the costs, but insurers are bracing for a bruising.

"The ice storm that hit Central Canada this weekend has caused significant physical damage and emotional trauma for many households, and will likely be a significant insured event for the industry," André-Philippe Hardy, a financial services analyst at RBC Dominion Securities, wrote in a note to clients. Insurer RSA Canada said the storm was "one of the worst we've seen in Toronto in quite some time."

Insurers aren't the only ones on the hook – they share the burden with reinsurance companies that take on a portion of the risk – but the latest storm reopens a deep wound. The property insurance industry is coming to grips with evidence that severe weather events are becoming more frequent. That has potentially significant implications for consumers and businesses, who may be forced to pay higher premiums as insurers try to recover from the losses.

"As severe weather events become more extreme and frequent, we will continue to pursue our efforts to ensure that the protection we offer reflects our country's new climate reality and that governments, consumers, businesses and all stakeholders pursue their efforts to better adapt to climate change," Charles Brindamour, chief executive officer of insurer Intact Financial Corp., said in November after the company reported its first underwriting loss in a decade.

The natural disasters worsen what is already a tough period for insurers. Interest rates and bond yields are low, making it hard for them to earn decent returns off the claims they collect and invest. Benchmark five-year Canadian government bonds pay just 1.87 per cent, despite a modest rise in yields this year.

The weather havoc of 2013 came after four straight years with insured damages from natural disasters worth near or above $1-billion, according to the Insurance Bureau of Canada. To put that figure in context, Quebec's historic ice storm in 1998 caused $1.6-billion worth of insured damage, or roughly $2.1-billion after adjusting in today's dollars.

Insurers are quickly learning the compounding problems cannot be ignored. In September, Julie Dickson, who heads the Office of the Superintendent of Financial Institutions, dubbed 2013 an annus horribilis for the industry and proposed that insurers consider new ways to transfer their risks to more stakeholders.

One option is to issue insurance-linked securities, such as catastrophe bonds. This type of debt pays investors high yields, rewarding them in an era of rock-bottom rates. In return, buyers of the bonds take on risk – and can lose some or all of their investment if a natural disaster strikes.

Property and casualty insurers said it is too soon to assess the total damage from the latest storm, but it is clear what is causing most of the claims. Travelers Canada, which bought The Dominion of Canada General Insurance Co. this year, said the majority of the calls it has received are because of damage related to falling tree limbs and power outages.

Once the claims are tallied, the insurers will work with reinsurance companies to divvy up the bills. The splits can vary. Intact Financial spokesperson Gilles Gratton said his firm is responsible for the first $100-million of damage. Between $100-million and $150-million, Intact assumes 12 per cent of the costs, with reinsurers taking the rest. Between $150-million and $400-million, Intact bears just just 1 per cent of the burden.

In November, the company reported an "unprecedented" after-tax catastrophe loss of $201-million, net of reinsurance, following floods this summer. The insurance division of Toronto-Dominion Bank also announced a $125-million after tax charge on the back of claims for evacuations and home and automobile damage.