Canadian wildfires: The impact on the insurance industry

This post was originally published on August 8, 2024, and was updated on October 29, 2024.

As wildfire season in Canada is well underway, residents of affected areas are preparing for evacuations and property losses – which also significantly impacts the insurance industry. 

The Jasper wildfire has been reported to cost over $880 million in insured losses (while it was originally predicted to cost up to $700 million), similar to the damages caused by the Slave Lake wildfire in 2011. However, this is still far from the costliest wildfire known to Canadians – the infamous Fort McMurray disaster of 2016 – where insured losses hit an astonishing $4.4 billion.

Let’s take a look at how these unfortunate events have impacted (and will continue to impact) the insurance industry across the country.

A history of wildfires in Canada: Insured damages

Below is a table outlining Canada’s history of wildfires from 2011 to 2023 (along with each event’s insured damages) sourced from the global credit rating industry, Morningstar DBRS. Note that the numbers for 2011, 2016, and 2017 have been adjusted for inflation.

As of July this year, Morningstar DBRS claims that it’s still too early to predict whether damages from 2024 will be comparable to what the country saw in 2023 – this was Canada’s most active and destructive wildfire season on record. So far this year, 2.4 million hectares of land have been scorched which, notably, is above the historic average of 2.1 million hectares. This is, however, still significantly less than the 16.5 million hectares affected throughout the entirety of 2023.

Canadian wildfires and the insurance industry

The agency doesn’t anticipate any material credit rating implications for P&C insurance companies in Canada due to the Jasper wildfire. This is because the industry has a well-diversified product line (e.g. auto insurance, property insurance, commercial insurance), and it’s also well-diversified geographically.

To explain this in simpler terms, the risk of insurance companies is balanced enough that severe disasters, like the Jasper wildfire, can be compensated by the premiums paid elsewhere. For instance, Canadian insurers may need to pay an extensive amount of claims for home insurance in Alberta, but this may be balanced out by the limited amount of claims for car insurance in Ontario.

The Canadian insurance industry is also backed by reinsurance – which is essentially insurance for insurance companies. The risk is transferred from one company to another, and in the case of the 2016 Fort McMurray wildfire, reinsurance was able to cover 85% of the losses.

That’s not to say that the impact on the industry as a whole isn’t significant. As wildfire season has and is expected to become more severe over time, home and business insurance are two coverage areas that will see significant consequences.

What do wildfires mean for home insurance in Canada?

The increase in home insurance claims will lead to higher premiums for everyone. Climate change and natural disasters are among the many factors contributing to home insurance inflation across Canada, and wildfires are only one aspect of it. Again, insurers need to balance out the risk overall, but of course, those living in high-risk areas will see the worst of it. 

Also read: What Canadian homeowners need to know about wildfire season

Will Canadian home insurance companies deny fire coverage?

It’s standard for home insurance policies to include coverage against fire – but as these incidents continue to ramp up, one pressing concern for Canadians is whether fire insurance could be denied completely for high-risk homes. While this is unlikely to happen in the near future, California is one relevant case worth looking at.

Back in 2023, major US providers – including State Farm and Allstate – pulled back from offering home insurance coverage to Californians as a result of costly wildfire claims. ABC News also reported that seven of the top 12 companies either paused coverage or placed harsh restrictions on policyholders. Some homeowners even saw premiums nearly 10 times higher than before. 

This can also be compared to flood insurance in Canada where some companies have either denied coverage to high-risk homes or made it prohibitively expensive – which led to the development of Canada’s National Flood Insurance Program. It’s important to note, however, that unlike fire insurance, flood insurance isn’t included in standard home policies to begin with. Instead, homeowners need to add the protection through endorsements, such as overland water and sewer backup.

What insurance companies are doing to prepare homeowners

CBC News recently announced that major Canadian insurers – including Economical, Aviva, Intact, and Gore Mutual – have partnered with Wildfire Defense Systems (a Montana-based, American company) to help limit their losses.

The goal of this partnership is to prevent damage by intervening ahead of time, for instance, by sealing up homes. The company has already responded to more than half a dozen communities in Alberta and BC hotspots, offering its services free of charge to homeowners. 

What do wildfires mean for business insurance in Canada?

Wildfire destruction isn’t just limited to homes; unfortunately, commercial businesses located in the affected areas will also suffer. And of course, this means the losses will also trickle down to the business insurance industry. 

Jasper National Park, for one, is an extremely popular area for tourism, and the Alberta premier recently announced that 30 to 50% of the buildings here could be destroyed – which will then lead to an influx of commercial property damage and business interruption claims from affected establishments.  

Similarly to homeowners, business owners can expect their commercial insurance premiums to rise as providers need to pay out a large number of claims. And of course, those that operate in wildfire hotspots will see the most expensive premiums.

The bottom line

The wildfire crisis in Canada doesn’t appear to be ending anytime soon, significantly impacting the insurance industry as a whole. While well-diversified product lines and geographic locations can help with balancing risk, only time will tell as to how insurers will adapt to the ongoing challenges.

Also read

• The average cost of home insurance in Alberta
• Does insurance cover damage from fallen trees?
• How does inflation impact my insurance premiums?