It’s widely acknowledged that the assumption climate risk can be treated like any other insurable stressor – absorbed through better modelling, higher premiums, and incremental adaptation – no longer holds. This is a financial-stability problem currently housed in the insurance industry, and the legal system is about to get involved.
Canada’s home insurance system is absorbing losses at a pace that households, insurers, and governments are increasingly unable to sustain.The Superintendent of OSFI has warned that a future catastrophe could destabilize Canada’s entire insurance sector, and the CEO of IBC stated insured losses that once rarely exceeded $500 million annually are now surpassing $1 billion year after year.
Insured wildfire losses have risen more than 1000 per cent in over a decade and total annual insured losses could skyrocket to $100 billion by 2050. Since 2015, average home insurance costs have risen by roughly three quarters nationally, with increases of 300 per cent in some high-risk regions.
As a senior executive at Definity has put it, the constraint is no longer modelling sophistication or underwriting capacity; it’s consumer affordability. At some point, technically accurate prices simply become unpayable.
Even with those increases, insurers are struggling to keep pace. In 2023, Canada’s personal property insurers posted a combined loss ratio of 101 per cent for home insurance, meaning payouts and expenses exceeded premiums. At the same time, coverage is shrinking and deductibles increasing. Roughly 10 per cent of households have no access to affordable flood insurance and 80 per cent of Canadian cities are built on floodplains.
When private insurance pulls back, governments are asked to step in. Roughly three quarters of all federal Disaster Financial Assistance Arrangements payouts since 1970 occurred in the last decade. These programs, along with other emergency relief mechanisms, were designed for occasional shocks, not repeated, compounding losses driven by a changing climate.
About 40 per cent of high-risk Canadian household debt is concentrated in areas with high physical climate risk. Thousands of households are already turning to crowdfunding to pay the bills when disaster strikes. Yet risk visibility across the financial system remains poor: only about 12 per cent of deposit-taking institutions assess whether properties used as collateral even carry flood insurance.
Uninsurable homes are difficult to finance and harder to sell. That is how an insurance affordability problem turns into a housing-market and banking-sector issue. Declining property values and impaired collateral leave lenders holding increasingly fragile assets, with clear implications for balance sheets and systemic risk.
Insurers and regulators have rightly called for better adaptation measures. These measures are necessary but not sufficient. As a Board member at Allianz warned, relying solely on adaptation is a "false comfort" that leads to economic non-viability. Yet regulators charged with safeguarding financial stability have, so far, taken a largely hands-off approach.
At present, climate damages are largely socialized. Households pay through higher premiums and uncovered losses. Governments pay through disaster relief and infrastructure repair. Meanwhile, the firms most responsible for generating the underlying risk pay nothing. This is an unstable allocation of liabilities that will not hold indefinitely.
Against that backdrop, climate damage litigation in Canada is becoming inevitable. Attribution science has advanced rapidly and can now estimate the contribution of major emitters to specific climate events and damages with growing confidence. At the same time, the scale of losses is making the status quo politically and fiscally untenable. Legal precedent is also accumulating.
At least 25 US states, cities and counties have launched cases built on attribution science. A German court has affirmed that large emitters can be held responsible for the consequences of their emissions. New York and Vermont have introduced legislation requiring large polluters to pay into climate-damage funds.
Cost recovery is also not new to Canada. Tobacco and opioid litigation followed the same trajectory: mounting public costs, strengthening scientific evidence and, eventually, enabling legislation for cost recovery. In the tobacco case, individuals and provinces secured a $32-billion settlement from major companies operating in Canada.
As climate litigation advances, three categories of plaintiffs are likely to emerge. Governments are natural actors, seeking to recover disaster-response, infrastructure-repair and suppression costs. As premiums rise, coverage disappears and property values erode, class actions by households are viable, and already underway in Washington. Insurers themselves also have an established mechanism through subrogation, allowing them to recover losses from parties that contributed to the damage.
In California, insurers recovered $11 billion from the utility responsible for the Camp Fire. To date, Canadian insurers have shown little appetite for this path, potentially due to the fact that they invest billions in fossil fuels and underwrite coal and oil and gas projects. But even partial recovery would introduce an upstream funding source for climate damages, slowing the rate at which costs are pushed onto households and taxpayers. These revenues could also be used to pay for better resilience measures.
The physical costs of climate change are moving beyond the limits the system was designed to absorb. If those costs are not shifted upstream to those responsible, they will continue to stress the insurance system, until insurability itself breaks down.
Kiera Taylor is a senior analyst with Investors for Paris Compliance, a shareholder advocacy organization that holds Canadian companies accountable to their net-zero commitments.
