Western Canada's wildfires: Implications for property and casualty insurers

Investing.com - The ongoing wildfire season in Western Canada is proving to be particularly challenging, with the Jasper Wildfire Complex prompting emergency evacuations and threatening significant insured losses.

Analysts at Morningstar, however, believe that the financial impact on Canadian property and casualty (P&C) insurers will be manageable, thanks to the industry's robust preparedness and risk mitigation strategies.

On July 22, 2024, Alberta's government issued emergency evacuation orders for Jasper and Jasper National Park, displacing around 25,000 residents, seasonal workers, and tourists. The out-of-control wildfires, fueled by high winds, have already damaged various buildings and infrastructure within the town of Jasper. Although complete assessments have yet to be conducted, early indications suggest substantial potential losses.

This year's wildfire season is still unfolding, making it uncertain whether it will rival the record-setting 2023 season, which saw the most destructive wildfires in Canada's history. Thus far, about 2.4 million hectares have burned in 2024, slightly above the historical average of 2.1 million hectares but well below the 16.5 million hectares scorched in 2023.

Morningstar analysts point out that the Canadian P&C industry is well-prepared for such catastrophic events. The industry’s strong capitalization, diversification, and reinsurance strategies are expected to mitigate the severity of losses from wildfires. For instance, during the 2016 Fort McMurray wildfire, approximately 85% of the insured losses were covered by reinsurance.

The Jasper Wildfire Complex, in particular, poses considerable risks. Alberta's premier has indicated that up to 50% of Jasper’s buildings could be destroyed. Additionally, Jasper National Park, a major tourism hub, could lead to increased business interruption claims.

Morningstar suggests that insured losses from this event could approach or even exceed $700 million, adjusted for inflation, similar to the 2011 Slave Lake wildfire. Recent wildfire incidents, such as the Bush Creek East and McDougall Creek wildfires in 2023, caused $240 million and $480 million in insured damage, respectively.

Despite these challenges, Morningstar analysts are optimistic that the Jasper incident will remain an earnings event without materially affecting capital or credit ratings for Canadian P&C insurers. The sector's robust capitalization and geographic diversification, along with effective reinsurance risk transfer strategies, provide a strong buffer against such catastrophic losses.

However, the increasing frequency and severity of extreme weather events are beginning to add volatility to Canadian insurers’ results. Since 2021, wildfires have become a more significant contributor to Canada’s insured natural catastrophe losses. Two large wildfires in 2021 and three in 2023 represented about one-third of the total $3.1 billion in severe weather-related losses in 2023. Morningstar warns that if this trend continues, Canadian P&C insurers may face growing earnings pressure going forward.