Banks should be at the table for climate risk discussions, P&C execs say

Banks should be included in any “whole of society” approach to limit development in high-risk areas prone to natural disasters, Canadian property and casualty insurance professionals say.

For several years, P&C insurance executives have questioned why banks finance mortgages for homes in high-risk areas of Canada. Many have urged banks to conduct due diligence on the potential risk of losing those assets due to natural catastrophes.

Gary Hirst, president and CEO of CHES Specialty Risk, raised the question again at the National Insurance Conference of Canada in Gatineau, Que., last Thursday. As an audience member, he raised the matter during a Q&A session following a panel on whether Canada could reach the kind of home insurance crisis seen currently in California.

“One of the big issues…[in] Canada and Alberta is [that] the banks are lending money to these poor homeowners,” Hirst commented. “So, the poor homeowner is getting a mortgage, borrowing the money, going in a house, not really knowing that it is in a known hazardous area — whether it’s flood, hail or whatever — and then those homeowners will end up in a situation where they probably won’t be able to buy insurance, they probably won’t ever be able to sell that house, and they’re just stuck there with the biggest asset as a millstone around their neck.

“So, surely the mortgage banks have a responsibility here as well. It’s not just insurance. The banks should know where all these problem areas are, and they should be treating customers fairly, as we do here in the insurance industry.”

After wildfires in California caused an estimated US$40 billion of insured damage, many U.S. P&C insurers have either pulled out of the state’s home insurance market or drastically raised their rates in response to the high wildfire risk in the area.

Recent NatCats in Alberta have people in the Canadian P&C insurance industry wondering if what’s happening in California could happen here, too.

The NICC panel discussion included a bleak report about the state of home insurance in Alberta after several damaging hailstorms and a wildfire highlighted the elevated climate risk in the area.

Alberta saw $3.6 billion of insured losses after a hailstorm in 2024 and $1.2 billion of insured losses after a hailstorm in June 2020.

Also in the news: TruStar aftermath sees P&C industry focus on due diligence, governance

Kevin Lea, vice president of the Insurance Brokers Association of Alberta, observed that in parts of northern Calgary, close to the airport, homeowners in “Hail Alley” have seen their insurance premiums increase 48% this year, compared to the previous year. Deductibles for homes suffering hail losses have soared as high as $10,000, or the price of a new roof, he reported.   

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These issues are calling into question the historic pattern of developing in areas at the highest risk of NatCat losses, he said.

“The hail belt of north Calgary, 30 years ago, there were almost no houses there,” said Lea. “We built all those houses in the last 30 years. And we know that that is the most hail-prone area in the entire country, but yet we chose to make the decision to build there.

“In south Calgary, they’re building a massive new subdivision with at least 1,000 homes in the first phase right next to the Bow River, down in the floodplain and the valley. We, as a society, industry, government, continue to make the same mistakes over and over again. The lessons just don’t seem to be learned.”

Responding to Hirst’s question, David Sorensen, Alberta’s deputy superintendent of insurance, agreed mortgage banks should be involved in a societal discussion about restricting development in areas highly exposed to NatCats.

“How do we get them to the table?” Sorensen asked. “That’s a really good question, but they have to be there, I think. Because from all-society perspective, they’re part of it.”

Sorensen suggested banks should be making their mortgage loan decisions “based on more than just the credit risk.” They should also factor in the home’s location, how much risk the lender is taking if the house is in a flood zone, and if insurance is available to rebuild it.

Lea echoed the desire to see banks take a broad view of the risk they are undertaking by mortgaging homes in NatCat-exposed areas.

“The banks [should be] taking a little more holistic risk management [view] of their portfolio,” says Lea. “What would the stress-testing of the consumer be if their insurance premiums triple in the span of a few years because of the risks in there? What’s the likelihood that’s going to lead to the borrower not being able to pay their mortgage payments because they’re now shelling out a fortune for insurance, or paying out $10,000 hail deductible twice in three years?

“That’s going to have a significant financial impact, and the bank should be taking that into account.”

Lea cautioned he didn’t want regulatory “overreach” to prevent banks from lending at a time of a housing crisis in Canada. But he did want banks at the table to be discussing the issue with governments and insurers.

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.