How climate change could reshape insurance in B.C.

North Americans were in the thick of winter when, in January, large swaths of the priciest real estate in Los Angeles began to burn. Like millions around the globe, Aaron Sutherland watched the gut-wrenching TV footage as the fire engulfed thousands of homes, reducing entire communities to ash.

As the Insurance Bureau of Canada’s vice-president for its Western & Pacific region, Sutherland had travelled to Jasper, Alberta, after last year’s devastating blaze, and to Kelowna after fires swept through the area in 2023.

“[L.A.] was eerily reminiscent of what we’ve seen in this province, and all of the emotions that come with that,” says Sutherland. Insurers are there to piece things back together, he adds, “but there’s a human toll that cannot be fixed, and that’s absolutely devastating.”

It’s also becoming more familiar, and more costly. Climate change is nothing new, says Sutherland, but the scope and scale of its impact is growing dramatically, as are insurance payouts, and that’s creating fresh challenges for B.C.’s insurance industry.

According to the Insurance Bureau of Canada (IBC), because of severe weather—including those wildfires in Jasper, along with Toronto area floods, a Calgary hailstorm, the aftermath of Hurricane Debby and severe storms and deep freezes in B.C.—2024 shattered Canadian records for insured damage related to severe weather, with the final tally topping $8.5 billion. Over $7 billion occurred in July and August alone.

The losses were nearly triple those recorded in 2023, and 12 times the annual average of $701 million from 2001 to 2010. The previous record was in 2016, when forest fires ravaged Fort McMurray, Alberta, and led to $6 billion in insured damage.

Because of those unprecedented losses, says Sutherland, rates are on the rise. “Pressure on insurance premiums is a symptom,” he says. “The disease is the increased threat that we face from our changing climate.”

Werner Antweiler, associate professor at the UBC Sauder School of Business, agrees. The insurance business functions by looking at what has happened in the past, assessing probabilities and pooling risk. The problem is, with rapidly worsening climate change, insurers can no longer use the past to reliably predict the future.

“When we look at fire risk or flood risk, now we have a trajectory that is off from the baseline, and that means it becomes harder to actually assess whether a property that you insure is risky or not,” he says. “So we need better data.”

As the risk of events like flooding and fire increases, rates will necessarily follow, says Antweiler. That, in turn, could lead to consumers underinsuring themselves, and insurance companies either restricting what they insure or exiting high-risk areas altogether.

“Some of these things can be priced into the product, but increasingly we’re going to see areas that don’t get any coverage—and then we have a problem as a society,” says Antweiler. When people are underinsured, governments often step in to help, he adds, but, especially in the era of climate change, that can be a slippery slope.

“If you live in a high-risk area like a floodplain, you have certain higher risks, and we shouldn’t let people socialize that risk by having the taxpayer as a backstop,” says Antweiler. “That private risk suddenly becomes a public risk and a public cost, and that is the point where we need to rethink how insurance operates in those domains.”

High-risk areas like California have tried to address similar challenges in part through regulatory measures including caps on insurance rates and the government-led FAIR Plan—which provides basic coverage for properties when traditional insurance companies refuse. But Sutherland says their approach has become a cautionary tale, because it has forced some insurance companies to scale back their offerings or exit the market altogether, and left under-insured homeowners vulnerable.

At the same time, he argues, governments haven’t done enough to mitigate the impacts of climate change. Climate initiatives can be a hard sell, but many of them come at a relatively small cost, including amending building codes, incentivizing risk reduction through things like sprinkler systems and fire-proof roofing and halting development in high-risk areas—even though waterfront homes and forest getaways are often some of the most in-demand locales. In some areas, he adds, the only viable option is to get residents out.

“Land use planners have to have frank conversations about strategic withdrawal from areas where we’ve built and never should have,” says Sutherland, who points to the 2018 floods in Grand Forks, which led to better flood protection as well as the buyout of dozens of homes. “Those are difficult conversations, but we can’t keep putting ourselves in harm’s way and expect not to bear the financial and human cost of doing so.”

Sutherland strongly encourages homeowners to read the fine print on their policies and to shop around so they get the best coverage for the best price. (“We spend so much time thinking about the next TV or iPhone purchase,” he quips, “and far less thinking about our insurance policies.”) They should also do their part in keeping their properties fire- and flood-proof.

For now the insurance industry in B.C. is robust, he says, but its future will depend on what governments do when it comes to things like building codes, development decisions and regulation of the industry. Ultimately, though, it boils down to how society deals with the underlying problem of climate change.

“It really is going to require a whole-of-society response, and I think it’s imperative we start thinking of this growing climate risk as a question of when, not if, and start realizing it is going to hit. It is going to impact me and my community,” says Sutherland.

“California was slow to adapt and has been woeful in the investments it’s making to protect its communities moving forward. Unfortunately, that’s also true for British Columbia,” he says. “But we still have time. Let’s look at what’s happening south of the border as informative of what we need to do today to prevent the same thing from happening here.”