Fort McMurray wildfire could trigger spike in insurance rates

Insurance companies forced to fork over billions of dollars to cover damages from the Fort McMurray wildfire will remain financially sound despite their enormous losses, but some homeowners will likely face spikes in their premiums.

"It'squitepossible wecould seesome rate increases, probablyregionally," said Jason Mercer, an analyst at Moody's Canada Inc."Can'timagine it will bewholesaleacross-the-board rate increases."

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Mercer said anyone who lives near a dry forest or somewhereparticularly vulnerable to wildfire risks could see their rates spike.

"And thatnaturallyoccursaftera large loss in insurance, there's sort of a period of time whererates go up and then competitionsortofbrings it back down," he said.

The Bank of Montreal has predicted the devastating wildfire could cost insurers as much as $9 billion while Moody's has estimated a total around $5 billion. Whatever the final tally, it will likelybe the costliest natural disaster in Canadian history.

According to the Insurance Bureau of Canada,the floods in southern Alberta in 2013 hold the current record for insured losses,costing the insurance industry $1.8billion. The record had been held by the ice storm of 1998 that hit eastern Ontario and Quebec, withinsurers doling out$1.6 billion. The massive fire that destroyed much ofSlave Lake,Alta., in 2011 caused more than $700 million in insured losses.

StephanieSorenson, a spokeswoman for insurance companyIntact Financial Corporation, said it's still too early to say whether rates will go up because insurers have been morefocused onwhat's happening on the ground and don'thave a clearpicture yet of all the damage.

Butthe wildfire in Alberta alone wouldn'tnecessarilytrigger a rate increase, saidCelystePower, a spokeswoman for the Insurance Bureau of Canada.

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"In terms of home insurance and big events like this, it's not exactly the case. No one event will lead to automatic increases in premiums. There are a lot of factors in the mix."

Instead, she suggested hikes would be caused bythe cumulative impactfrom therise of unpredictableextreme weather and natural catastrophes. Before2013, insurers paid on average around $500 million a year in extreme weather insurance damages, she said.Now that total hovers around $1 billion.

Increase in severe weather

"We are seeing anuptickin severe weather eventsso it's kind of on thegreaterscaleon how that couldimpact."

Insurance companies will suffer quarterly losses because of some of thesepayouts, Mercer said,but they won'tbe "catastrophic losses to the institutions." None of the recent costly natural disasters have sunk anyinsurance companies, he said.

After the losses reach a certain limit,reinsurance willkickin insurancethatinsurancecompanies take out with other insurers. Those insurers are usually larger global players, so the risks get spread out throughout the global insurance system, Mercer said.

"Insurers are well capitalized to deal with this type of event," addedPower."This is what we plan for. This is what we're here for.

"They do a lot ofplanning, research,actuarialdatacompilation to make sure theyare able to indeed pay out, be it a small event, a large event or anythingin between."

Rebuild depleted reserves

Still, the unpredictability of these weather disasters and thenumberof them will force insurance companies to try to rebuild their depleted reserves.

"I think insurance companies keep reserves for those unanticipatedtypes of events like the fires, like thefloods, like theice storm," saidRamanJohal, a Vancouver-basedlawyer who specializes in insurance claims."When youhave so many in quick succession, you can't keep the reserves for those. The reserves start to dwindle."

"When youhave a practise of keeping reserves of unanticipated risks,and those unanticipated risks become more and more prevalent, it becomes problematic for insurance companies. Andthey would have to increasethose rates."

Ordeductibles may increase in areas that are more prone to fires and floods, she said.

"Because they have to recover. They've got torecouptheir money and build up those reserves again," she said."You can't avoid increasing premiums when you're dealing with these types of more common disasters."