Exploring Canada’s rising secondary peril losses: Mitigation beyond modeling

Examining last year's unprecedented natural catastrophes in Canada, it becomes readily apparent that the "unexpected" has become the norm, which means society must prepare accordingly.

2024 marked Canada’s costliest year on record. In the space of just a few weeks in July and August, four different events unfolded that saw insurers and reinsurers pay out over $8 billion in claims.

• $1 billion in insured losses stemmed from the summer floods in Ontario and the Greater Toronto area.
• $2.9 billion came from the post-tropical storm that travelled across southern Quebec in the aftermath of Hurricane Debby.
• $1.2 billion in insured damages was inflicted by wildfires in Jasper, Alberta.
• The remainder was the result of a record-breaking hailstorm in the Calgary area in early August, which caused nearly $3.2 billion in insured losses and is the second costliest NatCat event in Canada’s history.

Notably, all four of these events are classified as secondary perils – a term that can be misleading.

Traditionally, natural catastrophes have been split into primary and secondary perils. Primary perils, such as earthquakes and hurricanes, are severe but relatively infrequent. In contrast, secondary perils such as floods, wildfires and hailstorms occur frequently but have historically been less severe than primary perils. Primary perils modeling has kept pace with key loss drivers like inflation, urbanisation and climate change, while modeling of secondary perils requires continued focus and investment.

Last year's total industry insured cat losses of around $8.9 billion far outpaced the $6 billion from 2016 (adjusted for inflation), the year of the Fort McMurray wildfires, and is 12 times the annual average of $701 million recorded in the decade between 2001 and 2010. Yet much of 2024’s losses were driven by two secondary perils: the Calgary hailstorm and Hurricane Debby, which combined nearly equaled the total annual cat losses in Canada from 2021-2023.

In recent years, secondary perils have accounted for over 60% of annual natural catastrophe losses globally. So was last year an aberration, when secondary perils accounted for nearly 90% of total losses in Canada?

If you look across the past 10 years, Canada had nine secondary peril losses greater than $1 billion (adjusted for inflation). Essentially, the industry should expect a billion-dollar cat loss every year. In addition, 2022, 2023 and 2024 were among Canada’s largest insured natural catastrophe loss years, which illustrates the upward trend of cat frequency and severity.

Climate change always comes to the forefront of this rising trend. For example, it’s clear that wildfires will increase as temperatures rise. But did you know that Canada is warming at twice the rate of the global average? In fact, further north in the Canadian Arctic it is more than three times.¹ This means wildfires will be more likely to occur in Canada as temperatures rise and we may see fires occurring in areas that haven’t traditionally been a concern. The Halifax fire in 2023 the Manitoba wildfires this year are examples.

It's important to acknowledge that climate change is not the sole cause of increased secondary perils. Urbanisation and inflation also play a major role, with more costly assets increasingly being impacted by secondary perils.

More people are moving to cities and more buildings are built to accommodate a growing population, including houses. When a cat event occurs, there is more exposure, which leads to more claims and larger claims. Between 2016 and 2021, Canada’s population grew about 5%, while 18 of the largest 25 municipalities saw population growth of over 10%. In fact, the United Nations expects Canada to have an 88% urbanisation rate by 2050 compared to 83% in 2021.²

Between 2020 and 2024, Calgary experienced rapid growth and was the fastest growing Canadian city in 2023 and 2024. Despite lasting only a few hours, last summer’s Calgary hailstorm caused over $3 billion in insured losses compared to losses of $1.6 billion from the 2020 Calgary hail event (adjusted for inflation).³  The storm’s severity was largely a function of the storm's location, but also because exposures had increased over time. Severe convective storms pose challenges as a slight shift in location can lead to significantly more severity. Calgary will continue to be exposed to hailstorms and as the city continues to grow the re/insurance industry will see larger and more frequent cat claims.

Inflation also drives increased costs. Statistics Canada reports a cumulative increase in residential construction costs of more than 65% since mid-2020 versus an ~18% increase in the same time for CPI. This increase varies by city and location, with greater Toronto seeing an increase of over 80%. This translates to higher costs to re/insurers when claims occur, and retaliatory tariffs imposed by Canada on US parts and materials suppliers are fuelling increased costs for auto repairs and home construction.

The re/insurance industry has taken note of the fact that these events are happening more frequently and inflation and rising asset concentrations in urban areas ramping up the total value at risk.

As secondary perils become more frequent and losses escalate, risk transfer is a time-tested mechanism to ensure sustainability of communities, yet the strongest lever to increase insurability is to double down on mitigation and adaptation efforts to reduce losses before they occur.

There is clear evidence that mitigation measures are highly effective in minimising the losses associated with secondary perils. Research from the Institute for Catastrophic Loss Reduction (ICLR) in the aftermath of the Fort McMurray wildfire, for example, shows that homes built in compliance with FireSmart guidelines were much more likely to survive:

• 81% of all surviving homes assessed during the study were rated as FireSmart, within Low to Moderate hazard levels
• 94% of the time, the surviving home in matched (side-by-side) pairs was rated as being at lower risk than its burned counterpart by a rating differential of more than 30 points.⁴

Further, ICLR found that every dollar spent to make a new home fire resistant saves up to $35.⁵

Clearly, preparation and resilience measures can improve protection. In wildfire-prone areas, building with fire-resistant materials and creating defensible spaces around homes can spell the difference between survival and destruction. In flood-prone regions, updated zoning laws and investments in modern flood defenses can also help prevent hundreds of millions in damages.

The cumulative financial impacts of secondary perils significantly outweigh that of primary perils. This is especially true for regionally focused companies, for whom a single hail event can pack as much punch as a primary peril. As the price tag on recovery from secondary perils increases, insurers must focus on evaluating their accumulations and examine their books in a different light. Recognising and pricing these risks appropriately will be vital.

Insurers need to start by understanding the exposures on their balance sheets. Carriers often monitor and closely track their exposure to earthquake risk – especially BC earthquake – through modeled losses. However, they need to monitor accumulations to all perils including wildfire, hail events and floods.

The first step is to decide how to monitor those exposures. This can be done at different levels of granularity as secondary perils can be very targeted – such as a tornado that goes through a neighbourhood – or very broad, like a flood or winter storm. This means understanding the accumulations at multiple levels: by municipality, postal codes or FSAs. Sometimes it may be important to look at individual streets or neighbourhoods to review total concentrations, and it's critical to manage large condominiums and high-rise buildings where multiple insureds may be located.

The accumulation from each peril may need to be monitored differently based on the aspects of the risk. This is especially true for wildfires, which display a high degree of interannual variability. In 2023, wildfires were rampant in Canada, spreading quickly when driven by high winds which carried embers several kilometres. Accumulation monitoring of different loss characteristics (e.g. how far an ember flies) allows a company to consider various scenarios (e.g. a 2 km circle) or a more extreme circle (embers flying over a 5 km or a 7 km circle). In addition, these accumulations can help an insurer set moratoriums while wildfires are still active if the risk is too great to write new business.

A carrier that tracks its accumulations by peril in real time can actively steer its portfolio and act faster and more nimbly than its peers. For example, a company tracking its exposures in real time might see a large increase in exposure in a certain area, which could signal multiple issues. First, its peers may have adjusted product features such as price increases that could lead to a higher take-up rate for its own portfolio. Peers may have also adjusted deductibles and coverage (e.g. excluding or sublimiting flood). This may signal that a carrier should adjust its own underwriting controls for pricing, coverage and new business if the accumulation risk is growing too rapidly. It’s common for a carrier to unexpectedly grow too much in a certain pocket as peers adjust their strategies. Without real-time tracking, decisions are made on retrospective information, and trends are not seen as quickly, which leads to unintended consequences.

After a company understands its exposures it can set risk tolerances, which can be done on a peril basis and by location or city. Tolerances may be set in several ways:

• based on total insured value (TIV),
• market share by policy count, premium, or TIV, or
• managing modeled probable maximum loss (PML) at a certain return period (e.g. 1 in 50-year return).

Tolerances help ensure a company doesn't grow too quickly in a certain area and manages its risk appropriately. Often tolerances are based on the impact from a single event to capital position or earnings. Reinsurance plays an important role in managing these accumulations, but having a robust framework in place ensures the reinsurance program is efficient and sustainable over the longer term.

Tolerance levels should be reviewed at least annually or adapted as capital changes and real time aggregation becomes important. Companies with multiple business units such as commercial and personal lines should manage their overall tolerance level across the group; however, they should consider how to reasonably allocate capacity to each unit. This allocation is usually based on factors such as returns for the risk, diversification aspects and cross-selling products to consumers. By achieving this alignment, each business is allowed to operate independently while the risk tolerances of the group are not breached.  

Calculating PMLs is a preferable way to set risk tolerances because this enables the characteristics of each risk to be considered – e.g. flood risk when a house is on a hill or at the bottom of a hill. PMLs reflect the true exposure; however, they are only as good as the data captured. Real time data that tracks sublimits, endorsements and risk mitigating features reflect the real accumulation risk of a portfolio. Otherwise, the true risk could be overstated or understated when looking at a PML.

In 2024, the remnants of Hurricane Debby caused significant losses throughout Quebec, affecting over 80,000 insureds. It was the largest flooding event in Canada since the 2013 Calgary floods but it wasn't the only large flood event of the year. Toronto experienced significant flooding in July, which led to almost $1 billion in total insured losses.

Flooding is a risk that will keep increasing with climate change. As the temperature rises one degree Celsius, the air can hold an additional 7% of water. As more events occur with more significant rainfall, the risk in insurance companies' portfolio will become greater as areas that were formerly graded at medium risk may shift to high risk. While we can manage accumulations for today's risk, we also need to understand how risk will evolve and steer portfolios to capture the future risk. This means considering where a portfolio may need to shift in five to 10 years and chart a path toward a more sustainable future.

Seeing the entire picture is critical. This means mapping exactly what's insured, the value at risk, the locations of key assets and the likelihood that secondary peril events could occur in those areas. As an industry, we need to address the growing threats that secondary perils pose, continue to build and refine transparent secondary peril models, and assess accumulation in the best possible way. This enhances the industry’s resilience to the risk posed by secondary perils.

While mitigation and adaptation strategies like resilient building codes and better land use planning are the most effective ways to reduce the risks associated with secondary perils, insurers must build sustainable portfolios to adequately assess risk and manage their own accumulations.

Key questions must be asked, such as:

• Am I tracking accumulation risk by each peril? 
• At what granularity should I track each peril and should I track it in multiple ways?
• Do I have the right risk management controls on actual exposure?
• Am I evaluating my maximum potential loss in a realistic way?
• Am I making the fastest portfolio steering decisions based on real time insights?
• Am I planning my business and reinsurance strategy based on a true understanding of my risk?

As the impacts of secondary perils continue to grow, the industry needs to work together to strengthen its knowledge of secondary perils and continually build out better modeling capabilities. Secondary perils aren’t diminishing, so our understanding of the risk should only improve. Proper management of accumulations by peril becomes imperative.

Assessing, modeling and managing risk is critical in gaining a deeper understanding of portfolio exposure and monitoring accumulations. Yet this is only part of the solution.

Let’s focus now on the power of data and segmentation and how collective efforts can help mitigate the growing impact of natural catastrophes.

Insurance plays a vital role in helping customers and communities recover from extreme events. Insurers have already closed 86% of the over 280,000 claims from the four largest 2024 cat events.⁶ While insurance is a vital financial safety net, it cannot be the only line of defense. Robust risk mitigation is essential to reduce the likelihood and size of losses before they occur, and insurers are well-positioned to encourage policyholders to adopt mitigation measures—through pricing, coverage design and deductibles.

To effectively differentiate the multitude of varied risks at a granular level, insurers need to utilise cat experience to identify trends. Events like the Calgary hailstorm or the Jasper wildfire offer valuable insights into which property features are more prone to loss. But these insights can only be teased out if the right data is captured in the first place.

For example, while it’s well known that certain roof types are more susceptible to wildfire, insurers can’t analyse this risk if information on roof type isn’t collected at the underwriting stage. Without this data, it becomes difficult to identify trends or make informed decisions.

With sufficient data and experience, insurers can segment their portfolios more effectively and refine underwriting strategies to truly manage catastrophe risk. Proactive data collection and thoughtful analysis are key to addressing evolving risk differentiation and achieving portfolio resilience.

Often, risks are segmented into broad categories such as good, average or poor. However, the more granular the segmentation, the more tailored and effective the underwriting approach can be. Imagine segmenting a portfolio into 10 distinct categories, each with its own differentiated strategy. Now, imagine having 10 categories per peril each having different approaches. This level of precision not only enhances risk management but also sets an insurer apart from its peers by demonstrating a deeper understanding of risk and a commitment to customised solutions. This also leads to better profitability for the insurer.

Once data is captured and analysed, insurers can begin to adjust pricing to reflect the true volatility of each risk. Price serves as a signal to consumers – helping them understand their exposure and encouraging mitigation.

Earlier we examined findings from the Institute for Catastrophic Loss Reduction (ICLR) following the Fort McMurray wildfire, showing that homes built to FireSmart guidelines were significantly more likely to survive. If two homes—one FireSmart-compliant and one not—are charged the same premium, the insurer is failing to differentiate risk. Homes can feature up to nine different types of siding—such as wood, concrete, or brick—each influencing wildfire risk in distinct ways. Depending on the material, the associated loss cost can vary by as much as 300%, ranging from the most vulnerable to the most resilient option. If insurers don't differentiate, this can lead to adverse selection, as lower-risk policyholders seek out insurers who reward mitigation through pricing.

Beyond premiums, insurers can also use deductibles and sublimits to reflect risk more appropriately. In Canada, insurers have the flexibility to set deductibles by peril, but this is not yet widely practiced – even as secondary peril risks increase in frequency and intensity.

When every policyholder is offered the same flood deductible regardless of their exposure, the opportunity to differentiate is lost. For example, while all basements are flood prone, a simple concrete-finished basement presents far less risk than one outfitted with high-end electronics.  Basements with high-end electronics and equipment can have a 25% higher risk than those without. In such cases, differentiated deductibles can better align with the actual risk.

In high-risk areas, the cost of providing full coverage for secondary perils can make insurance products unaffordable. To manage exposure and improve affordability for consumers, insurers may apply sublimits. For example, a home located in a hail-prone zone with standard asphalt shingles may be subject to a lower sublimit than one equipped with hail-resistant roofing. These strategies allow insurers to balance risk with accessibility, ensuring coverage remains economically viable in increasingly volatile environments.

Insurers that capture and analyse data to differentiate properties are better positioned to attract higher-quality risks through more refined underwriting. On the other hand, undercharging or offering significantly broader coverage can attract poorer-quality risks and increase a portfolio’s volatility.

The catastrophe losses of 2024 were unprecedented and complex, yet that complexity offers valuable lessons. Insurers should ask themselves:

• Am I capturing the right data on each property to analyse my portfolio by peril?
• Am I segmenting risks into appropriate rating classes?
• Have I used my own claims experience to identify high and low risk features?
• Do my underwriting strategies unintentionally create moral hazard?
• Am I doing enough to attract and retain good-quality risks?

There’s no doubt that secondary perils will continue to drive losses in Canada. But insurers that refine their underwriting approach—leveraging data to inform decisions on premiums, deductibles, and sublimits—will build more resilient, sustainable portfolios.

The rising frequency and severity of secondary perils in Canada have redefined the landscape of natural catastrophe risk, demanding an urgent shift in how exposures are modeled, managed, and mitigated. With 2024 marking the nation’s costliest year on record—driven largely by floods, wildfires, hailstorms, and post-tropical storms—the insurance industry must adopt a multi-faceted approach that integrates real-time accumulation management, robust risk tolerances, and the strategic use of data to differentiate and price risk accurately.

As climate change, urbanisation and inflation continue to amplify losses, proactive mitigation measures—such as resilient building codes and targeted adaptation efforts—are vital to protecting communities and portfolios alike. Only by collaborating across the industry, strengthening data collection and analysis, and constantly refining modeling capabilities can insurers and communities build resilience and ensure the long-term sustainability of coverage in the face of ever-evolving secondary perils.

¹ Canada’s Changing Climate Report, Elizabeth Bush and Greg Flato, Environment and Climate Change Canada, 2019
² Trends and outlook, Transport Canada, 2021
³ Canada’s fastest growing and decreasing municipalities from 2016 to 2021, Statistics Canada's Centre for Demography, 2022
⁴ Why some homes survived: Learning from the Fort McMurray wildland/urban interface fire disaster, Institute for Catastrophic Loss Reduction, April 2017
⁵ An impact analysis for the National Guide for Wildland-Urban Interface Fires, Institute for Catastrophic Loss Reduction, May 2021
⁶ Catastrophe Loss Database, CatIQ, August 2025