Insurance risk: The devil is in the details

The fine print has never been more important

Like many other industries, Canada’s insurance sector faces unprecedented risks — from the impacts of climate change and rising crime rates to shifting market dynamics and evolving regulations. As insurers, organizations, and policymakers try to find their footing in this new era, it's become critical to read and understand the small print in contracts.

Extreme weather events put immense pressure on the insurance industry, and these are becoming more frequent and costly. Over the past decade, annual insured losses from natural disasters have averaged $2.2 billion, a threefold increase over the rolling 10-year average, as reported by the Insurance Bureau of Canada. The 2024 Jasper wildfire alone resulted in $880 million in insured losses.

In response, insurers are revising risk models, raising premiums in high-risk areas, and tightening up the terms of coverage. Canadian businesses need to prepare for higher costs, increased scrutiny, and potential gaps in coverage.

Shifting market conditions

Despite the challenges above, the insurance market remains resilient. According to CMB Insurance Brokers, a one percent drop in commercial insurance premiums in the third quarter of 2024 indicates more competition among insurers. But, with catastrophes like the Jasper and BC wildfires driving up the volume of claims, many companies are opting for stricter underwriting and risk selection processes.

Regulators are also stepping up their scrutiny. The OSFI flagged elevated interest rates, market instability, and climate risks as key concerns for 2024 and 2025. Financial institutions, like banks, must now consider integrating climate risk assessments and strengthening their capital management to stay resilient.

As natural disasters, auto theft, and market volatility converge to shape the future of insurance in Canada, stakeholders need to embrace innovation and collaboration. For insurers, this means enhancing risk modeling, adopting new technology, and proactive regulatory measures will be critical to managing these challenges.

For businesses, this means you must understand the risks and adopt preventive measures which can help mitigate their financial impacts and ensure continued access to affordable insurance coverage.

Risks to watch

More frequent and severe natural disasters: Rising claims from wildfires, floods, and storms will lead to a surge in claims.

Geopolitical risks: Global political tensions and conflicts introduce uncertainties that impact market stability and investment strategies.

Medical inflation: Increasing healthcare costs are resulting in more claim expenses, which pushes health insurers to adjust premiums and coverage limits.

Property risks: Higher property values and construction costs, along with natural disasters, increase the volume of claims and make underwriting more complex and expensive.

Liability verdicts: An increase in large liability verdicts, influenced by social inflation, can result in higher claim payouts and adjustments in liability coverage. 

For Insurers

Cyber security threats: A rise in cyberattacks, including global tech outages, pose significant challenges and leaves insurers bracing for a wave of claims and reconsidering underwriting standards.

Technology advancements: AI and digital innovations create both opportunities and challenges, but an insurer’s technology needs to continuously evolve to stay competitive.

Economic uncertainty: Fluctuations in interest rates and economic conditions impact investment returns, as well as the overall financial stability of insurers.

Talent acquisition and retention: The insurance industry struggles to attract and retain skilled professionals, which in turn impacts operational efficiency and innovation. 

Shifting regulations: Evolving regulations require insurers to adapt quickly to maintain compliance or face failures that could potentially lead to legal and financial repercussions.