Reinsurers have continued to reduce coverage for Canada’s largest natural catastrophe risks since the global reinsurance market correction in 2023 sent shockwaves through Canada’s P&C insurance industry, a new industry report finds.
Rising costs, tighter terms, and higher retentions forced insurers to rethink their catastrophe financing strategies after increasingly large global loss years saw Canadian insurers’ reinsurance premiums increase by 25% to 30% without significant losses of note. Those with losses on their portfolio reported rate increases of between 50% to 70%.
But the latest wake-up call for primary insurers is that reinsurers want to narrow their focus on primary global perils like hurricanes and earthquakes, finds the Insurance Institute of Canada’s CIP Society in its latest Emerging Issues Research Report series.
Reinsurance protection has withdrawn for small and more frequent hazards, and has become more expensive for secondary perils like flooding, wildfire, hail, and local severe wind events, IIC says in Catastrophe Financing: Implications for the Insurance Industry in Canada.
However, these these secondary perils are the leading causes of insured damage in Canada. And Canadian insurers continue to see their reinsurance coverage decrease.
“Prior to 2023, reinsurance would typically cover about 60% of catastrophe insurance claims in Canada, and since that time it typically covers about 50%,” the report reads. “Some reinsurers cited difficulties with modelling secondary perils. Some reinsurers expressed the need for change because of poor results over many years.
“All involved found the changes to be significant, abrupt, and largely unanticipated,” the report continues. “Reinsurance recoveries in 2024 and going forward will be lower when measured as a share of total claims paid by the insurance industry.”
With reinsurers pulling back from covering these risks, Canadian insurers must adapt accordingly, the report states.
“Over the next 10 years, senior management in most insurance companies should spend more time addressing the growing importance and complexity of catastrophe financing and the broader implications for the company,” IIC writes. “Unanticipated increases in reinsurance costs may have consequences across the company, like concerns over rate adequacy, while higher retentions increase earnings volatility.”
In times of crisis, relying too heavily on global reinsurers can create vulnerabilities, especially if capital is tied up in foreign markets, the report notes. “Unanticipated increases in reinsurance costs may have consequences across the company, like concerns over rate adequacy, while higher retentions increase earnings volatility.”
Also, catastrophe claims over the next 10 years are expected to continue to grow, and that means insurers need more reinsurance. The insurance industry must be prepared to take action if the availability or affordability of reinsurance is threatened, the report says. That includes maintaining a strong capital base within Canada to ensure claims can be paid promptly when catastrophes hit.
“[The] insurance industry should be prepared to act if concerns arise about the availability and cost of reinsurance, as this would represent a threat to the industry,” IIC writes.
This isn’t the first time global disruptions have reshaped reinsurance strategies. The report notes that during World War II, reinsurance availability was significantly curtailed, leading some markets to consider requiring reinsurers to hold more capital domestically. These discussions are again resurfacing.
Before the COVID pandemic, global reinsurers had a public spat with Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions, over the regulator’s demands that reinsurers park a certain amount of capital within Canada to cover off Canadian insurance claims. At the time, reinsurers noted their financial model requires them to move global capital to wherever it is needed most.
Feature image by iStock.com/Bob Hilscher
