Climate change has become a prudential risk for Canadian insurance companies: report

Climate change risk is not only a concern for corporate boards, governments, and environmental organizations but a fundamental business issue for Canadian insurance companies, according to a new report from the Canada Climate Law Initiative.

The key finding of the report, Life, Health, Property, Casualty: Canadian Insurance Company Directors and Effective Climate Governance, is “that climate change has become a prudential risk for Canadian insurance companies,” says the report’s author, Janis Sarra. Sarra is a law professor at the Peter A. Allard School of Law at the University of British Columbia and principal co-investigator of the Canada Climate Law Initiative.

To date, she says, there haven’t been any Canadian reports taking “a deeper dive into the kinds of risks that Canadian insurers face.”

The report notes that climate change creates multiple risks in product design and delivery, expected loss coverage, underwriting services, investment portfolios and management of assets.

It’s also essential to distinguish between the risks that “non-life” versus “life and health” insurers face, says Sarra. Non-life insurers give property and casualty insurance for homes, cars and businesses, director and officer liability insurance, errors and omissions insurance, and other non-life general insurance.

There is increased frequency and severity of climate-related events on the property and casualty side, including wildfires, flooding, windstorms, and coastal storm surges, which are immediate and medium-term risks, says Sarra. Longer-term risks include rising sea levels. Risk on the “non-life” side may exist “for some of the smaller cap companies, but a lot of that risk can be adjusted on an annual basis” in prices consumers pay.

Globally, reinsurers — which insure the insurers — are also likely to either raise their prices or refuse to reinsure some parts of the world, including parts of Canada, Sarra says, without serious mitigation and adaptation measures.

For life and health, there will be no short-term material impacts because “the life and health insurer of last resort in Canada is our national health care system.” Therefore, the private sector remains at lower risk because the public will pay for the first impacts of air pollution and air quality, morbidity, or health outcomes from natural disasters such as wildfires through Canada’s universal healthcare system.

But what’s unknown is the financial implications to insurers of chronic physical risks related to longer-term shifts in climate patterns resulting in regular heatwaves and rising sea levels for “both sides of the balance sheet.”

The report also gives guidance on the types of questions directors should be asking of their managers and how they might assess the degree to which their company is facing risks.

There is a climate-related risk to the assets and portfolios of insurers as investors, especially on the life and health side, Sarra adds. For example, which legacy industries that insurers are invested in are likely to have problems? That’s not only the oil and gas sector, she says; insurance companies are also heavily invested in real estate and construction, where there could be risk to portfolios because of flooding.

“It’s important to remember these are beginning conversations,” she says. “There are a lot of impacts that we don’t know, they’re under the surface [like] a huge iceberg. And we’re just beginning now to get a handle on what those risks look like as we transition and meet Canada’s commitment to a net-zero carbon economy.

“We count on [insurers] to insure our homes, our businesses, our properties. And so they have to stay ahead of the curve because they have to be financially healthy in order to meet their promise to all of us as policyholders. That’s why it’s so important.”