Increased construction costs, the growth of exposed assets, flood insurance challenges, and continuing high reinsurance rates are all issues emerging from Canada’s record natural catastrophe (NatCat) year in 2024, says an Aon report.
Overall, global insured losses from natural disasters in 2024 are estimated at $145 billion, “well above the short-, medium-, and long-term averages,” the report states. “This total is expected to evolve into 2025 due to additional loss development.” About 60% of those losses were uninsured.
In Canada, four major events occurred within a period of 30 days in July and August, leading to the highest annual insured losses in Canada on record. NatCat losses wound up costing the Canadian P&C insurance industry $8.5 billion, per stats released by Catastrophe Indices and Quantification Inc. (CatIQ).
Two socio-economic factors led to the high losses in Canada, Aon’s report observes.
One is the higher costs of building materials for repairing homes.
“The increase in building construction costs seen in Canada in recent years, coupled with a shortage of skilled labor and supply chain disruptions, has driven up the cost and time required for rebuilding efforts,” says Aon’s report, Climate and Catastrophe Insight. “As a result, insurers face higher claim payouts and prolonged claim resolution times.”
A graph in the report shows an increase of between 100% and 120% in the Building Construction Price Index for Toronto, Ont., since 2017 Q1. The value of the average sale price of a Toronto home in November 2024 was $1.06 million, per data from WOWA.ca, an online personal finance encyclopedia.
In Calgary, the increase for building material costs is just under 100%, and in Ottawa the increase is closer to 80%. In Vancouver, B.C., which has the second highest-priced real estate in the country (average home sale price of $979,000 in 2024, per WOWA.ca), building construction material costs increased about 70%.
Meanwhile, the construction industry in Toronto has between 500,000 and 600,000 workers, while elsewhere in the country, the number of construction workers in other provinces is 300,000 or below, per the Aon report.
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Secondly, the increasing exposure of assets, particularly in Alberta, which has seen high development and growth rates over the past two decades, continues to be an issue. This was on full display when an August 2024 hailstorm in Calgary led to a whopping 130,000 claims and $2.8 billion in damage, numbers that took some industry observers by surprise at the time.
“The hailstorm in Calgary on August 5 primarily affected northern parts of the city,” Aon’s report observes. “The area has seen a staggering urban expansion in recent decades, similar to some U.S. cities…
“An overlay of the hailstorm footprint shows that if the event occurred 40 years ago, it would have affected mostly agricultural land and residential property losses would have been dramatically lower than in 2024.”
In Ontario and Quebec, flood losses in 2024 will result in more urgent calls for a federal flood backstop, Aon’s report notes. The industry expressed disappointment earlier this year that funding was not allocated to the proposed federal government backstop in the 2024 Fall Economic Statement. That funding was promised in the feds’ 2023 budget.
“Homeowners’ flood policy limits remain relatively low in both the Greater Toronto Area and Montreal, areas heavily affected by urban flooding events in 2024,” Aon’s report observes. “Such low limits can be insufficient in cases of significant property damage or rebuilding costs. As a consequence, many affected property owners experienced high out-of-pocket expenses.”
Aon says future investments in urban flood defenses and resilient infrastructure will be “critical” to reduce long-term flood risks and exposure.
The tough year for NatCats shone a light on concentration risks for P&C home and property insurers, which could expose them to higher reinsurance rates, the Aon report notes.
“In some cases, 2024 events highlighted the issue of concentration management, with some regional, but also national, insurers incurring large losses in excess of their provincial market share,” the report states. “The 2024 events and associated issues also affected the reinsurance business.
“Due to the significant amount of losses, reinsurers maintained higher premiums and stricter underwriting standards. As a consequence, the Canadian market remained an exception in the overall trend of stabilization seen in the global reinsurance market.”
Feature image courtesy of iStock.com/KangeStudio
