For Prairie manufacturers, climate change risks are becoming very real

By Jason Myers

Insurance premiums are on the rise for the foreseeable future. At the same time, property, casualty, and manufacturing insurance coverage is becoming harder to get. Prairie manufacturers are already feeling the pinch.

That’s what happens when insurance markets harden. Carriers show a limited appetite for risk. There is heightened underwriting scrutiny. And terms for coverage become less favourable at higher premium costs. Property insurance rates are already at 20-year highs.

To some degree it’s an outcome of inflation which has pushed up the cost of insurance claims. Financial market uncertainty has also had an impact in reducing risk appetite on the part of capital investors. But the biggest cause of the problem is the escalating volume of claims – it’s not an issue of man-made disasters. Globally they have accounted for about $10 billion annually for the past 15 years or so. It’s the impact of the growing number of natural catastrophes – NatCats for short – and especially catastrophic weather events.

The insurance industry defines a catastrophe or disaster as an event that causes insured losses of $25 million or more. Across Canada the number of natural disasters has quadrupled since 2008. The Prairies have had their fair share of them – from wildfires and heatwaves to storms that bring flooding, wind and hail damage, and an increasing number of tornadoes. 

The worst year for insured losses was 2016, the year of the Fort McMurray wildfire which accounted for 72 per cent of the $5.96 billion in total claims paid out in Canada. The fire was the worst natural disaster for insured payouts in Canadian history. Second on the list comes 2013 when flooding in southern Alberta – Canada’s third worst NatCat – accounted for just over half of the $3.87 billion in insured losses across the country that year.

Then come 2021 and 2023. In 2021 catastrophic weather events across Canada resulted in just over $3.0 billion in insured losses. About 25 per cent of those claims were in the Prairies. Windstorms that year caused $134 million in insured losses in Alberta and Saskatchewan. Flooding led to an additional $120 million in damages in all three provinces. And the hailstorm that hit Calgary that year resulted in about $500 million in insured losses.

Even worse was 2022 – the third worst year on record. Insured damages across Canada totaled $3.12 billion, with $470 million in claims paid for losses in the Prairies. It started in April last year with severe storms in Alberta and Saskatchewan and flooding in Manitoba which caused $85 million in insured losses. In June, storms across the Prairies resulted in $105 million in insured damages. In July, storms in all three provinces led to another $145 million in insured losses. Then $55 million more in August as a result of the Alberta hailstorm.

This year hasn’t been much better, although losses are still being calculated. Wildfires and floods have filled the headlines this year. We do know that about $300 million in insured losses were caused by summer storms in the Prairies. Remember the June floods in Alberta? They cost the insurance industry $40 million. The Canada Day storms and tornado in Alberta and Saskatchewan? Another $100 million. The Calgary hailstorm in July? Another $110 million. And don’t forget the severe storms and tornadoes in Alberta and Manitoba in late July. They added an additional $40 million in insured losses. That was all on top of the wildfires across the country – $720 million in insured losses arising from the Okanagan and Shuswap fires alone (the 10th worst catastrophe recorded in Canada) – and the storms and flooding that hit Ontario, eastern Canada, and Nova Scotia particularly hard.

Canada and the Prairies have suffered over the past few years, but weather-related natural disasters are a global phenomenon. And insurance is a global industry, with carriers reliant on multinational re-insurers to provide coverage (yes, even insurance companies need insurance).

Around the world, insured losses from weather-related NatCats have been increasing at an annual average rate of five to seven per cent over the past decade. There were 421 NatCats around the world in 2022, up from 396 in 2021, with insured losses amounting to US$125 billion. Worldwide insurance claims from weather-related events during the first half of 2023 amounted to US$50 billion, up from $48 billion for the same period last year and the second highest since 2011.

But insured claims are only part of the human and economic costs suffered as a result of weather-related disasters. Over 31,300 people around the world lost their lives from NatCats in 2022. And, according to the global reinsurance industry, insured losses accounted for only 45 per cent of the US$275 billion in total economic losses estimated last year. That’s not too far off the estimate for the 2016 wildfire in Fort McMurray. It caused an estimated $9.9 billion in total economic damage, of which only $4.3 billion or 42 per cent was insured. 

Prairie manufacturers know all too well that the risks to their business are not only from escalating insurance premiums. NatCats cause damage to materials, final products, and equipment. They disrupt delivery schedules and supply chains, pushing up costs and in some cases forcing a suspension of operations. These are risks that need to be managed, and insurance provides only partial coverage.

Now the insurance industry itself is forcing manufacturers and all industrial clients to take positive action, not only to cover their own risks, but more broadly those of global climate change as well. Multinational reinsurers are requiring carriers to report the carbon emissions of their customers. In Canada, the Office of the Superintendent of Financial Institutions is requiring insurers and banks to report the emissions of their clients by January 1, 2025. 

What does all this mean for manufacturers? In the Prairies and across Canada, they will have to measure and report their greenhouse gas emissions by the 2025 deadline. Very few manufacturers are aware of these new obligations – and relatively few currently have an emission tracking and reporting system in place. The consequences of non-compliance are at best much higher insurance premiums and very likely the inability to secure property insurance at all.

These new measures will be transformational. They will require new investments, but they will be necessary for any manufacturer that wants insurance coverage for their business. On the positive side, the need to monitor emissions from energy use and production processes may be the first very important step to understanding where process improvements, cost savings, and productivity enhancements can be made. It will in any case require the implementation of digital tools that will accelerate the adoption of new technologies and enable improvements throughout manufacturing systems, companies, and supply chains alike.

Jayson Myers is CEO of Next Generation Manufacturing Canada – the country’s advanced manufacturing supercluster. An award-winning business economist and leading authority on technological change, Myers has counselled Canadian prime ministers and premiers, as well as senior corporate executives and policymakers around the world.