What Canada’s 2025 wildfire season looks like for insurers

Wildfire season 2025 is shaping up to be very active, and by extension, expensive for Canada’s property and casualty (P&C) insurance sector, says a new report from ratings agency Morningstar DBRS.

“With more than 1,800 wildfires having already burned over 2.8 million hectares, the 2025 wildfire season is likely to become one of the most destructive on record, already outpacing both the comparable period in 2024 and the 10-year average,” the report says. The fires in Alberta, Manitoba, Ontario, and Saskatchewan have so far led to more than 32,000 evacuations.

This active season follows 2024’s heavy stream of natural catastrophes (NatCats), which saw a record $9.1 billion in insured catastrophe claims, according to Catastrophe Indices and Quantification Inc. (CatIQ).

“The recurrence of major wildfire seasons, particularly in regions previously considered low risk, is raising broader questions around insurability and the protection gap,” says Marcos Alvarez, Morningstar DBRS’s managing director of global financial institution ratings. “Canada has so far avoided the extreme pricing or coverage dislocation seen in California, where property insurers have withdrawn or limited their offering in the midst of high losses and regulatory price constraints.”

Rising trends in NatCat-related losses will create pricing pressure on Canadian P&C insurers, Morningstar DBRS notes.

“After several years of disciplined underwriting and rate increases, particularly in personal property, we expect further upward pressure on premiums in 2025 and 2026, especially in wildfire-prone regions,” their report reads.  

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But commercial lines are seeing some easing of pricing pressure, in part thanks to more competition and better claims experience outside of property segments. Likewise, cyber and directors and officers coverages are seeing price declines, which is trimming earnings buffers overall for multiline insurers, the ratings agency says.

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Future concerns

Should seasonal wildfires continue to become more severe, the report notes reinsurers can be expected to reevaluate their exposure to Canada because, at some point, they’ll view it as a structural risk.

“While the 2025 wildfire season remains in progress, current loss trends point toward a similar pattern to 2024, when multiple severe events concentrated in Q3 drove spikes in combined ratios, particularly in personal property lines and especially if reinsurance attachment are exceeded,” it says. “…insurers have increased risk retention to manage reinsurance costs…this strategy improves cost control but may expose insurers to greater earnings swings in the short term and even to capitalization shocks in case of tail events.”

Rising fire frequency also heightens concerns around both insurability and the protection gap. While Canada has avoided the kinds of extreme pricing and coverage dislocations seen in California, where insurers faced with heavy losses and regulatory constraints withdrew or limited their property offerings, the clock may be ticking.

The report notes, “the Canadian market is showing early signs of coverage tightening for properties near wildland-urban interfaces and exclusionary clauses or stricter underwriting for wildfire risk in high-exposure zones…this retreat may result in a reliance on government-backed schemes to fill the coverage gaps.”

Recent California wildfires racked up losses exceeding US$30 billion, prompting some insurers to leave the market. Those losses also spurred regulatory changes and an increasing number of state residents having to tap insurers of last resort like the FAIR Plan.

“While Canada is not at that tipping point, the continued expansion of risk exposure into fire-prone regions, such as western Alberta and British Columbia, raises valid long-term concerns,” Morningstar DBRS’s report says. “While underwriting results are likely to remain volatile in 2025, we view the industry’s capital base, prudent reserving, and regulatory oversight as sufficient to support credit quality through another challenging catastrophe year.”

“We also note that Canadian insurers have been proactive in capital management, with conservative dividend policies and disciplined growth in high-risk lines. These characteristics continue to differentiate the Canadian P&C market from more stressed regions globally.”

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Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.