Fire and rain – change(d)

Insurance markets are rapidly transforming in the era of climate change and, for business, rethinking coverage is a new imperative

As Canada grapples with the growing threat of climate change, one thing is certain: with wildfires come big floods. As flames race through our forests, the capacity for nature to hold water after heavy rain disintegrates. This also creates more dry tinder for the next potential fire, affecting our large urban areas more and more.

Forest fires don’t just destroy trees; they bake the ground and kill the soil’s capacity to absorb water. It’s why floods reliably followed fires in Fort McMurray and, most recently, Atlantic Canada earlier this year. This pattern of destruction is deeply unsettling, and its profound consequences touch every facet of our society. Business is no exception. But today, climate change is posing increasingly complicated questions for business leaders in one vital, specific arena: insurance coverage and risk planning.

Because loss after loss, disaster after disaster, and dollar by dollar, the way we assess, prevent, insure and react to capital loss is now changing as fast as the climate. A climate where risk compounds.

With premiums rising and policies shrinking, what gets insured is changing; what isn’t covered is now a calculated risk. No doubt, these sorts of calculations lead to moral hazards, but they also may create scenarios where capital Insurance markets are rapidly transforming in the era of climate change and, for business, rethinking coverage is a new imperative is insured, but due to costs, human error is not. These are scenarios where the capital assets of a company are insured at great cost, while other forms of insurance get reduced or dropped altogether through budget cutting.

Hawaii, which recently faced the most devastating natural disaster in its history, is home to one of the largest outdoor public safety warning systems in the world. It’s a system the state has taken pride in, a system that symbolized Hawaii’s apparent readiness to cope with disaster. Despite this, as wildfires raged through Maui this year, the island failed to activate any of its 80 warning sirens for residents and tourists. This was a human error, an error that has exacted a significant human, social and economic cost.

Some organizations have leaned into preventive practices to minimize risk. Others, feeling perhaps overconfident, have instead put everything at risk. Whatever the approach, what’s clear now is that the actuarial tables have turned. The risks are not only deeper and of a different complexion, but the losses are increasingly real.

In this environment, assessing risk proactively means more than just watching the weather. Corporate bodies should not only begin now to plan for disaster but also to plan for predictable, substantial swings in the insurance market.

Today, Canadians can obtain different forms of insurance to cover the cost of wildfires, but that may not be the case for long. In California, a state experiencing its own fast and furious cycle of fires and floods, home insurance that covers the costs of these natural disasters has become elusive. We know with certainty that insurance premiums will rise in Canada, too, putting insurance further out of reach for those who find themselves at risk.

Volatile and frequent cycles of extreme weather are making it more expensive and less likely that physical assets can be totally insured. Over the past year, some real estate transactions in Western Canada have collapsed because policy writers refused to bind offers if wildfires were raging nearby.

In this ever-shifting landscape, proactive risk assessment is paramount. As the insurance industry braces for literal and metaphorical storms ahead, one thing becomes clear: the premium on prevention has never been higher. The future belongs to those who can adapt, mitigate and safeguard their assets in a world where risk is evolving faster than the climate itself.