Extreme weather remains the wild card as Alberta aims to fix auto insurance system

CALGARY — As Alberta prepares to make sweeping changes to fix its flailing auto insurance system, experts say extreme weather remains the wild card.

Nadja Dreff, senior vice-president and sector lead for global insurance and pension ratings with Morningstar DBRS, said the reforms announced Thursday by the Alberta government are a positive move for what has been an increasingly unprofitable market for insurers.

But she said it is unclear whether the government’s decision to allow rate hikes of up to 7.5 per cent per year, compared with a previously allowed cap of 3.7 per cent, will be enough to stabilize the insurance industry in the province.

“What none of us really know is the component of claims that will come from natural catastrophes,” Dreff said.

“And unfortunately, we have a very good example from the last quarter. Q3 was particularly bad in Alberta, in particular in the auto industry, because of a hail event.”

Premier Danielle Smith announced this week her government will make major reforms to how auto insurance works in the province by allowing bigger rate hikes as well as switching to a predominantly no-fault claims model.

Alberta’s private, for-profit auto insurance sector currently operates under a tort-based system, through which collision victims who have sustained both minor and major injuries are allowed to sue the insurance company of the at-fault driver.

Under the new system, car accident victims in most cases won’t be able to sue the party responsible for their injury. Instead, insurers would pay compensation at rates set by the government.

The Alberta government is making the changes after years of spiralling costs and rising premiums came to a head in 2024 when two separate insurance companies said they would pull out of the province.

Sonnet Insurance Company and Aviva subsidiary S&Y both announced they would phase out their auto insurance businesses in Alberta, citing claim costs that exceed premiums collected as well as a lack of opportunity to grow profits.

The insurance industry has said spiralling liability costs are the biggest factor straining Alberta’s system.

By cutting down on litigation costs, the government estimates that when the province’s new system is in place in 2027, it could lead to savings of up to $400 per year for the average insurance premium.

But moving to a no-fault system does nothing to address another factor behind Alberta’s auto insurance crisis — extreme weather and climate change.

Insurance Bureau of Canada statistics show Alberta has experienced five of the top 10 costliest disasters in Canadian history, all of which have occurred since 2016 and have placed significant strain on home, business and auto insurance premiums.

The massive hailstorm that hit Calgary last summer, resulting in nearly $3 billion in insured losses, ranked second on the list. Reports at the time described hailstones the size of chicken eggs damaging houses and cars.

“In many cases, it resulted in total writeoffs of cars, because it was such a severe hailstorm that the cars were damaged beyond repair,” said Dreff.

“Insurers don’t typically plan to pay out such huge amounts as they did for a hail event.”

Aaron Sutherland, the Insurance Bureau of Canada’s vice-president of Pacific and Western regions, said insured losses related to severe weather in Canada now routinely exceed $2 billion annually. By comparison, between 2001 and 2010, Canadian insurers averaged $701 million a year in losses related to severe weather.

Removing litigation costs from Alberta’s auto insurance system is a positive step forward, Sutherland said, but requiring the industry to continue to operate under a rate-hike cap — even a higher one — could make it impossible for insurers to deal with future catastrophic weather events.

“The cost of claims continues to grow dramatically, well in excess of the 7.5-per-cent (rate cap),” Sutherland said.

“And that is going to put continued pressure on insurers, and they’re going to face some really difficult decisions in the months and years ahead.”

The reforms Alberta is proposing are a fundamental change to the way motor vehicle collisions are handled in the province, said Nainesh Kotak of Kotak Personal Injury Law, which has lawyers operating in Edmonton and Calgary.

He said law firms will likely end up cutting lawyers and other staff, and added those job losses might not pay off in the form of cheaper premiums if extreme weather continues to result in spiralling insurance payouts.

“Unfortunately, I think this is where the federal government is eventually going to have to step in and provide some of that compensation, maybe by reimbursing insurance companies (in the event of natural catastrophes),” Kotak said.

“Because you know, the worst thing that could happen is for the insurance companies to start saying, ‘We’re not going to insure you for that.'”

In the U.S., some states have capped or suppressed the amount insurers can hike premiums by in an effort to protect consumers from higher costs. But that has led to consequences — in California, for example, some insurers have pulled out of the market completely.

Morningstar DBRS’s Dreff said Alberta has at least now given insurance companies some certainty about the framework of the system they will be operating under going forward.

“It’s a positive stop in the right direction — I think it will maybe pause potentially some exits,” she said.

“Do we know if the (Alberta) market will eventually become healthy? I think it’s going to take time and we’re going to have to wait and see.”

This report by The Canadian Press was first published Nov. 22, 2024.

Amanda Stephenson, The Canadian Press