Out-Law Analysis | 25 May 2016 | 5:23 pm | 3 min. read
It is already predicted that the level of loss will have a significant impact on property catastrophe reinsurance programmes, not least because an excess of available capital in reinsurance encouraged reinsurers to relax the terms of some of their usual provisions to attract customers. This means that those customers may be able to recover more from reinsurers than would otherwise be the case.
With so much spare capacity in the insurance and reinsurance markets, a large loss event like this is unlikely to considerably constrain capital adequacy. However, at some point reinsurers will surely have to take another look at the breadth of cover given by their policies, and decide whether they can continue to price in the wide cover being given or will have to tighten up their policy language.
Catastrophe risk modelling firm AIR Worldwide has estimated that the final industry insured losses from the fires will be between CAD$4.4 billion and $9bn (US$3.4bn - $6.9bn). This would make it the costliest natural disaster in Canada's history, dwarfing claims in relation to the 1998 North American ice storm and 2013 Alberta floods.
However, the Canadian ratings agency DBRS does not expect insurers' credit ratings to be affected by the huge volume of anticipated claims as a result of the comprehensive reinsurance programmes that firms have in place. Reinsurers will pay a share of the claims incurred by the 'ceding' insurer, helping to ensure that they will remain financially viable after major disasters like these.
Claims will be made on residential and other types of property insurance cover, but other types of cover, such as motor insurance, may also be hit. There will also be business interruption claims if businesses suffer significant downtime and loss of profits. In the longer term there could be liability issues if, for example, municipal authorities or other entities are considered to be at fault for either the cause or spread of the fire.
Domestic insurers will be keen to ensure that they support the local economy and respond promptly - although, with fires continuing to burn, it is difficult to get loss adjusters on the ground quickly. Once the immediate impact of the fires dies down, one issue that may arise is whether reinsurers will support the settlement of 'ex gratia' claims by local insurers under local political or regulatory pressure or for reputational reasons, or otherwise waive coverage defences. According to local press reports, some insurers have been extending coverage for evacuated residents' associated living expenses (ALE) beyond the terms included in the policy, or waiving deductibles.
The other question will be whether any of the energy companies based in the region have suffered either physical damage or business interruption under the terms of their policies. AIR Worldwide's loss estimates explicitly exclude losses related to the oil industry, for which Alberta is a hub given its extensive oil sands. These facilities were evacuated by the local authorities as wildfires spread, cutting Canadian oil output by a million barrels a day.
Traditional business interruption insurance requires there to have been physical loss before cover can be triggered, and the oil sands facilities have not suffered any physical damage as a result of the fires. However, there has been an increase in the purchase of non-damage based business interruption types of insurance cover very recently.
The current flood of excess capital in the reinsurance market has driven down rates, and there are concerns that some reinsurers have been relaxing their standard terms in order to attract more business. For example, it has been suggested that so-called 'hours' clauses, by which the ceding firm can aggregate all losses arising from one particular catastrophe within a certain time limit into a single claim, have been diluted to the extent that the ceding firm would find it easier to reinstate coverage and claim for two events rather than one.
In the past, issues have also arisen as to liability on the part of various reinsurers. This happened in relation to the Australian wildfires of 2009, and the 2007 fires in California. Subtle differences may then arise in the way in which the different reinsurers respond to the underlying liability policies, as opposed to property covers. The precise cause of the Fort McMurray fire is not yet widely known.
Although most commentators see the McMurray fires as just another large loss event, which will not itself be sufficient to move the markets in terms of price or breadth of coverage, broader questions will need to be asked about the increasing likelihood of large-scale catastrophic events. In particular, insurers and reinsurers will have to review their approach to climate change risk - something that played a significant role in this event, as extreme temperatures and reduced snowpack in the affected area encouraged the spread of the fire.
Nick Bradley is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.