Extreme weather will impact every area of insurance: New Climate Risks Report explores risks and solutions

The Institute's new research report, Climate Risks: Implications for the Insurance Industry in Canada, provides an important analysis of the risks presented by extreme weather and climate change, and explores actions required by the industry to address them over the next 10 years and beyond.

Since the 1980s, the payouts for severe weather damage claims have doubled every 5 to 10 years. If the trend continues it will drive profound, transformative change in Canada’s insurance industry.

This report focuses on three climate-related risks, asks and answers six critical questions, and offers three recommendations for the industry.


1. More people and assets are in the way.

Damage to buildings and infrastructure (ie physical risks) is expected to increase because of growing numbers of people and assets located in areas of risk. This increase is worsened by aging infrastructure and the rise in frequency and severity of extreme weather events.

Changes in exposure mean that large losses will become larger, and the average annual severe weather claims paid by insurers in Canada is expected to double over the next 10 years, increasing from $2.1 billion a year to $5 billion.

There are actions that can mitigate those risks in the short run. They include homeowner action to protect private property and government action to protect public infrastructure.

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2. Young people and cities are suing for climate change accountability.

Legal actions over losses resulting from past greenhouse gas emissions, as well as climate action or inaction by governments and private organizations create liability risks.

Some legal actions seek to recover the cost of damage resulting from extreme events. Others seek compensation for the expense of investing in protection from future hazards. While climate liability actions are expected to target major emitters – not insurance companies and brokers – insurance exposure is present through investment and coverage risk.

3. Change is difficult to manage.

Society is transitioning to a low-carbon economy driven by market dynamics, technological innovation, policy action and shifting consumer preferences. The changes come with transitional risks that can take on many forms, including underwriting, operational, investment and regulatory risks.

Insurers will need to monitor the evidence about change in the frequency and severity of extreme events, combined with emerging knowledge about loss prevention best practices. They will also need to manage concentrations of exposure in a specific region and of a specific peril. Finally, leveraging reinsurance will help insurers reduce insolvency risk.

The report seeks to address the increases in physical, liability and transitional climate risks. In particular, the report explores six critical questions:

1. What change is expected in Canada’s climate?

Canada’s climate has already shifted, and experts predict significant further changes. Forecasts show the country will be warmer, with more extremely hot days.

Intense rainfall events are projected to increase in frequency and severity, and increased risk of wildfire ignitions and a longer fire season is expected to threaten more communities.

Coastal flood risk is projected to increase because of rising sea levels, which threaten costal infrastructure and buildings. Extensive ice-free conditions are projected for Canada’s Arctic Ocean.

Change in the Canadian climate over the next 15 to 25 years is known with high certainty and will be driven largely by emissions released over the past century and by other decision that have been made by governments, businesses, and individuals.

Change in the climate over the longer term, however, depends on emissions that will take place over the next 50 years and beyond.

Icestorm damage

2. Why is an increase in physical damage expected?

The number of people who live, work and play in high and rising risk zones is expected to rise. At the same time, much of Canada’s infrastructure is increasingly vulnerable and unable to provide the high level of service experienced to date. These systems were designed to anticipate historic, moderate weather events, and smaller populations.

While increased exposure and vulnerability were the primary factors driving losses higher to date, the climate is expected to bring more volatility in the future; in the short term, occasional extreme events; and in the long-term, a dramatic increase in the frequency and severity of these events.

3. Will anyone be found liable for climate impacts?

Evidence of the change in climate is widely observed, but is the change due to natural or human factors? Attribution is difficult given a number of natural factors contributing to considerable variability in observable climate measures.

Over the past 30 years, however, climate models have demonstrated their capacity to distinguish between what is expected to occur naturally, and what can be attributed to human causes. There is mounting evidence of a growing gap between historic experiences and what can only be explained by human contribution.

This new evidence is expected to change the conversation about corporate liability and responsibility, and a number of legal cases have been launched in the US and may come to Canada seeking to recover damages resulting from severe weather or other climate risks.

While the insurance industry has not been the target of these actions – these have targeted major emitters to date – the industry is exposed through investment and coverage risk, including professional liability risk.

Solar panels and wind turbines

4. How will society transition to carbon neutrality?

Canada is transitioning to a low-carbon future, with per capita greenhouse emissions declining by 20 percent since their peak in 2000. The cost of providing energy from solar, wind and other renewable energy sources is increasingly competitive with coal, oil and natural gas across a range of uses.

The transition to a low-carbon future introduces implications for investments – the P&C industry invests more than $100 billion in Canada each year. New tools and practices to measure and manage climate risk in investments are emerging, with disclosure as the foundation.

A growing number of consumer and employees are demonstrating support for organizations committed to social responsibility and climate action. Actions taken by those organizations will have a direct impact on their reputations.

Climate change has been described as a “super wicked” problem, and four elements greatly increase the difficulty in finding a solution:
1. Time is running out.
2. Those who caused the problem seek to provide the solution.
3. No one has authority to impose a solution.
4. Decision makers fail to fully account for longer-term consequences.

5. Will there be regulatory changes for insurers?

Climate-related risks for the insurance industry are attracting the attention of insurance regulators and policy makers. Regulators work to protect insurance consumers, and provide an independent, objective assessment of insurance practices.

One threat for the industry involves the risk of price and product regulation. In response, the industry must be vigilant to demonstrate its capacity to pay claims following extreme events and to be transparent about coverage terms, conditions and underwriting practices with consumers

No solvency threats arose in 1998, following the significant and unexpected costs associated with the massive ice storm. Much of the industry cost was recovered through reinsurance. Moreover, the storm struck at a point in the insurance cycle when most companies were in good financial health.

With the increase in consumer demand for climate-related coverage, the industry benefits from working with market conduct regulators to build consumer confidence and understanding of terms. This is especially important as coverage terms and conditions evolve and the industry needs to communicate new information to policyholders.

Iceberg floating in river

6. How have insurers adapted to more extreme weather?

In the 1980s, the industry paid less than $0.1 billion a year, on average, in severe weather damage claims. The 1998 ice storm was a game changer. The storm resulted in 700,000 claims in Canada and 140,000 claims in the US over a period of just four to five weeks. The more than $2 billion paid in damages in Canada was unheard of before.

Recently, there have been many large loss events. This includes Canada’s most destructive hail storm (2010), urban flooding (2013), wildfire (2016), tornado (2018), severe wind (2018), and residential overland flooding (2019). Recent losses are 20 times that of the early 80s.

The P&C insurance industry in Canada has adapted its underwriting practices in response to sustained high severe weather damage claims, as well as lower interest rates, and now consistently reports a modest overall underwriting profit. The industry has also adapted to the sustained increase in the volume of claims by increasing its response capacity.

Furthermore, the industry has accepted new climate risks during this time, with several insurers introducing residential overland flood coverage in 2015. By 2019, half of homeowners with moderate or low risk properties in Ontario, Quebec and BC had flood cover, with coverage expected to grow.

Insurance is in the business of managing risk. Physical and transitional climate-related risks are emerging as the top risks facing society. The industry has begun the journey toward establishing leadership but more is needed.


The report provides three recommendations for the insurance industry in Canada to address climate-related risks over the next 10 years:

Embrace the opportunity and manage the risks presented.

The insurance industry must address underwriting and operational risks resulting from the impact of climate change. This can be done through industry collaboration and individual company action. It should also continue to support the development of risk reduction best practices, loss data, and models that inform industry management of flood, wildfire, and climate-related risks.

Be proactive in disclosing how the industry is handling the risks.

Consumers, investors, and regulators want companies to provide greater disclosure about how they are managing climate related exposures. Insurers and brokers should measure and disclose their greenhouse gas emissions and targets to reduce their environmental footprint. At the same time, insurers should demonstrate their ability to pay severe weather claims through stress testing and ongoing evaluation of reinsurance coverage and concentration of risk.

Share industry knowledge to motivate action in others.

The insurance industry is working to develop effective loss reduction solutions based on scientific study and industry knowledge. Brokers and companies should proactively share this information with property owners, governments, and other decision makers. Awareness building is most effective when accompanied by financial incentives, and insurers that align pricing and risk will reward actions that reduce the risk of loss claims.

This report focuses on the next 10 years, but also includes a warning that prospects over the next 50 to 100 years are not clear and will be shaped by the decisions made by major emitters and policy leaders in the months and years ahead.

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About the author of this report
Paul Kovacs is Senior Researcher with the Insurance Institute and is Canada’s leading authority on insurance and climate change. For more than 20 years, Paul has been a contributing author to the Intergovernmental Panel on Climate Change (IPCC), the world’s leading forum for the study of climate issues. The Panel won the 2007 Nobel Peace Prize. He is well known and respected in the industry as the founder and Executive Director of the Institute for Catastrophic Loss Reduction (ICLR) at Western University, and the former President and Chief Executive Officer of PACICC. Paul has been a popular commentator on insurance, disaster safety and economic policy, and has written more than 200 publications and articles.