The extent of financial losses stemming from the wildfire in Fort McMurray is becoming clearer, with one credit rating agency forecasting that insured damages will amount to between $2-billion and $6-billion.
DBRS Ltd. said on Friday that it will take months before the full cost of rebuilding the oil sands-centred community can be determined, but estimates of what insurers will likely have to pay can be tallied based on the benchmark of the Slave Lake fire in 2011 and some recent government disclosures.
While most of the 2,400 buildings damaged in Fort McMurray are homes, "the wildfire has also damaged business premises, hotels, supply and services businesses and a school under construction," wrote Stewart McIlwraith, senior vice-president and head of insurance at DBRS. In total, an estimated 10 per cent of buildings in the region are thought to be damaged, the report states.
The $2-billion to $6-billion range would be significant, compared with the usual annual losses faced by the insurance industry. It would amount to between 20 per cent and 60 per cent of annual 2015 property claims in Canada of $9.7-billion, DBRS's report notes.
This estimate in in line with an earlier $5-billion loss projection cited by Moody's Investors Services Inc. Together, these forecasts contribute to the growing expectation that the Fort McMurray fires will be the costliest natural disaster in Canadian history.
A lot of these losses will be passed on to reinsurance companies, which provide insurance companies with their own insurance in case of outsized losses. Mr. McIlwraith notes that reinsurance can kick in at as little as $10-million for small insurance companies with limited risk tolerance. For others, the cap is set at many hundreds of millions of dollars.
Intact Financial Corp., the country's largest property and casualty insurer, has made adjustments to its reinsurance program in recent years amid changing weather patterns. The company said that when it gets hit with $200-million of insured damages from one major disaster, the company has to absorb $140-million. Above that $200-million cap, more than 92 per cent of the losses are reinsured.
Deals like these will help to ensure that much of the burden of the wildfire losses will be borne by reinsurers, Mr. McIlwraith said. For those global companies, "the projected Fort McMurray claims will be notable but not at the high end when compared to larger events that have occurred in the United States and Japan, that have reached above $10-billion in insured losses," he said.
DBRS and Moody's have also said they do not expect the wildfire claims will have a significant credit impact on the Canadian insurers.