Alberta Wildfires Could Cost $7B with Minimal Insurer Credit Hit: Ratings Agencies

May 17, 2016 by

The Fort McMurray wildfires, which have been raging through northern Alberta, Canada since May 1, are likely to be the costliest natural disaster in Canadian history, according to recent reports issued by catastrophe modeling firm AIR Worldwide, rating company DBRS and S&P Global Ratings.

In a May 16 update, Boston-based AIR estimated that insured losses from the Fort McMurray wildfires will be between C4.4 billion (USD$3.4 billion) and C9.0 billion ($6.9 billion).

In a slightly different estimate, DBRS said that claims costs for the 2,400-plus destroyed or damaged buildings and associated relocation costs for 80,000 evacuees will be in the range of C$2 billion ($1.5 billion) to C$6 billion ($4.6 billion).

“This range of claim costs is 20 percent to 60 percent of total annual 2015 property claims of C$9.7 billion [$7.5 billion] in Canada,” said the Toronto-based DBRS in a report published on May 13.

While claims will be dominated by residential losses, “the wildfire has also damaged business premises, hotels, supply and services businesses and a school under construction,” said the DBRS report titled “Major Canadian Insurers Well Prepared for Fort McMurray-Sized Catastrophe.”

The initial estimate of damaged buildings suggests that approximately 10 percent of Fort McMurray’s buildings have been affected, the ratings agency said. “Overall, if the wildfires do not persist, it appears 85 percent of the area will have been spared, with damage localized to 10 percent to 15 percent of the community.”

AIR’s loss estimates capture residential, commercial, and automobile losses, as well as business interruption losses, except those related to the oil industry. AIR’s analysis also shows that insured losses will be dominated by residential losses, with several neighborhoods experiencing catastrophic loss.

AIR said it derived these loss estimates from its high-resolution Industry Exposure Database (IED) for Canada and damage ratios estimated from satellite imagery and experience from claims adjustments for historical U.S. wildfires. Total economic losses are expected to be higher than industry insured loss estimates, noted AIR.

“We believe that the brunt of the insured losses will be borne by the insurers that provide primarily property coverage, both personal and commercial,” said Standard & Poor’s in a report published on May 12.

“The personal lines property losses generally provide for replacement value as well as interim living expenses,” said the S&P report titled “Fort McMurray Wildfire May Prove Costliest Ever for Canadian Property and Casualty Insurers.”

“If the commercial properties including industrial installations are affected, the dollar amount of losses from commercial lines could stack up quickly,” according to S&P.

S&P also expects business interruption coverage to be a significant source of losses, “depending on how long the situation and ensuing recovery efforts will hinder the insureds’ ability to perform daily operations.”

DBRS and S&P agree that the Alberta wildfire losses are not expected to have an impact on the credit profile of major insurers operating in Canada because most companies have purchased reinsurance. (Similar conclusions were issued last week by A.M. Best and Moody’s.)

“Most of the insurers exposed to this event are nationally diversified companies, some of which are part of large multinational groups,” said S&P in its report.

“We believe primary insurers generally have sufficient available reinsurance coverage, adequate capital adequacy and enough group-level support (for certain subsidiaries) to absorb the losses,” the S&P report continued.

However, S&P warned that insurers with a smaller premium base and concentrated exposure to Alberta “could face some strain and their ratings may come under pressure.”

“The reinsurance programs begin to share in the losses when the direct writer has losses exceeding a certain level, ranging from $10 million to $100s of millions, depending on the size of the direct insurer and its risk tolerance,” said DBRS.

Global reinsurers, which provide these catastrophic covers, “are generally well positioned to cope with such risks as they diversify their risk exposures from any one geographic event,” DBRS added.

Fort McMurray claims will be significant but not at the high end of larger events seen in the U.S. and Japan, which have surpassed C$10 billion ($7.7 billion) in insured losses, the ratings agency went on to say.

As a result, DBRS did not expect that this event would lead to reinsurance rate hardening.

“Wildfire events are not a new phenomenon in Canada, but the situation with Fort McMurray is unusual as it threatens a major economic center for Canada’s energy sector,” noted DBRS.

As a benchmark for the evaluation of the losses from the Fort McMurray wildfire, DBRS pointed to the Slave Lake wildfires, which burned in Alberta from May 11-14 in 2011 and destroyed one-third of that town.

The Slave Lake fire destroyed 374 homes and damaged 52 others, while surrounding communities also had fire threats and 59 additional homes were lost, said DBRS, noting that the resulting insured losses were close to $700 million, with another $400 million in uninsured losses.

“The spread of damage in Fort McMurray, the size of the city, and the area affected compared with Slave Lake suggest the amount of insured losses will be a multiple of those from the Slave Lake fire,” said S&P.

Although the most expensive Canadian wildfire was the Slave Lake event, S&P said the most expensive natural disaster in Canada was previously the windstorm/thunderstorm that hit southern Alberta in June 2013, causing insured losses of around C$1.8 billion ($1.4 billion).

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