Higher insurance premiums a fallout of the Fort McMurray fire

When the wildfire struck outside Fort McMurray a year ago, Rocco Neglia was sitting in a regular office meeting across the country at the head office of his firm Economical Insurance, in Kitchener, Ont.

The latest news was initially positive, recalls the vice-president of claims. “I got an email that morning from our Edmonton office saying wind conditions were good and it looked like we would avoid complications due to the fire,” says Neglia.

“But then at about 1:00 pm, that forecast changed and the entire town was given evacuation orders. I kept looking at my mobile device and knew by midday that it would need a huge response from the insurance industry.”

In the end, in addition to bringing devastation on the lives of residents it would become the most expensive disaster in Canadian history and the impact continues to be felt on the local and regional economy. And on top of that, citizens are likely to face higher insurance rates.

Insurance companies are in the business of making people whole and putting them back in the financial shape they were in before a disaster hits. But this “was no ordinary fire,” Neglia relates, in an understatement.

In the days and weeks immediately after the fire, insurance companies across the province began assessing the damage–many using aerial and satellite imagery—and tried their best to quantify the insurance claims from the individuals and businesses of the city, and then quickly bring help to where it was needed most. Insurers were on the hook for an unprecedented $3.7 billion in claims. (By comparison, the 2013 Alberta floods caused $1.9 billion in claims and the 1998 Quebec ice storm, $2.2 billion).

What will this inevitably mean to average home policy homeowners? Higher insurance premiums and larger government debt to cover the costs.

“The Alberta economy was already undergoing a recession in the oil industry before the fire hit,” says Pedro Antunes, deputy chief economist with the Conference Board of Canada. “No one will be better off after this fire. There will be a huge cost to the economy, a huge cost to household wealth and a cost to the insurance industry.”

But the rebound did also bring some bright spots, some of it funded by insurance payouts. Antunes notes that in the months right after the fire in 2016 money was being put back into the hands of the displaced in the Regional Municipality of Wood Buffalo through insurance payouts that paid for everything from hotel accommodations to car rentals to restaurant meals. Firefighters, too, received millions in overtime pay and building contractors started rebuilding.

“All of this will add to economic activity in the area, both in 2017 and 2018 with $1 billion being added back into the economy,” says Antunes.

According to an April 2017 study done by the Conference Board, “Fort McMurray Wildfires: Assessing the Economic Impacts, key numbers can now be put on the fire’s fallout.

• Almost 45,000 personal and commercial insurance claims were made as a result of the fire, which will require $1.2 billion to rebuild and repair homes.
• Personal property loss amounted to $2.4 billion and that can be broken down into about 2,000 homes that were affected or destroyed, 12,000 auto claims and 12,000 new fridges and freezers.

Antunes notes that once reconstruction is finished in late 2018, employment in the province is expected to be at the same level it would have been anyway—without the wildfire.

“For a while, seasonal building and building permits will be up and economic development measures will have substantial benefits,” says Antunes. “But post-fire, grants, loans and other capital will be required at the small business level to keep the growth and prosperity in the area going.”

And while there will be prosperity over the next two years, there will be indirect impacts to the region as well, and they will only show up in the long term. According to Rafat Alam, assistant professor and discipline co-ordinator in the Department of Economics at Edmonton’s MacEwan University, mental health impacts alone are conservatively estimated to be $2.27 billion.

“The majority of Fort McMurray residents went through traumatic depression,” says Alam. “They lost everything within a few hours. That’s traumatizing and studies on this are still ongoing.”

Alam notes that key lessons were learned—especially regarding the access points to Fort McMurray itself. “There was only one highway to go out and come in to Fort Mac,” says Alam. “There is lobbying now to build an alternative route in and out, sometime over the next three to seven years.” The cost? $1 billion.

There are also lessons to be learned by the insurance industry because of the $3.98 billion in losses they sustained. Alam believes new regulations will be imposed on homeowners by the insurance industry with several smart guideline studies eventually being released to the public. “This could mean guidelines on what materials should be used for roofs and siding, allowed vegetation in the yard, as well as other building updates.”

Luckily, for the average Fort McMuray homeowner, protection was offered by their homeowners’ policy. “Half of our claimants who lost their home took a lump sum settlement and either left the area or bought a new pre-built house in the Fort Mac area,” says Economical’s Neglia. “And another 50% are now in the process of rebuilding now.” And while some policies don’t allow the policyholder to build elsewhere, all policyholders can elect to take a cash settlement (albeit one that includes the depreciation value of the house).

Going forward, home insurance premiums will likely go up for all homeowners to cover some of the losses to the insurance industry but even these are likely to be small. “They can range from $2 a month to $50 a month, depending on the insurance company,” says Adam Mitchell, president of Mitchell and Whale Insurance Brokers in Whitby, Ont. “Remember, insurance companies raise money in capital markets and depending on the loss ratio of your particular insurer, homeowner insurance premiums will vary.”

As well, insurance companies themselves will have to regroup and learn to mitigate risk in the future. The next disaster could well be tied to how climate change will affect the bottom lines of these companies.

MORE ABOUT THE FORT MCMURRAY FIRE:

• Fort McMurray wildfire voted CP news story of the year
• Fort McMurray fire chief who led battle against ‘the beast’ retiring
• Newsmakers of the Year: Fort McMurray fire chief Darby Allen
• How much spending will wildfire recovery inject into Alberta?
• Fort McMurray fire response review to be finished by next summer
• Health researchers invited to study Fort McMurray fire fallout
• Canadian economy has worst showing since financial crisis
• Red Cross says nearly $300M raised for Fort McMurray