Focus needs to move from recovery to prevention
Canadian investors and insurers say wildfire risk is becoming harder to price due to modelling difficulties and a lack of funding for disaster prevention, even as real estate investment continues into areas on the edge of forests and other natural reserves.
A May 4 report from Canada’s auditor general finds that the country is failing to take action to make infrastructure more resilient to the effects of extreme weather made worse by climate change.
The report follows a February study from the National Research Council Canada showing that the number of high wildfire-risk zones in Canada, tracked through National Building Code reference locations, would nearly double if the world were to heat up by 2.5C above pre-industrial levels.
Patrick Kelly, head of climate analytics for the Americas at the insurance broker Aon, says wildfire modelling is still in its infancy and that wildfires are more challenging to model than other natural disasters.
Wildfires are difficult to predict and measure and becoming increasing volatility due to climate change, he says, insisting the idea they can be priced on previous losses no longer holds.
Insurers adapt
Indeed, insurers are having to change the way they work.
“In the past, where the risk wasn’t as severe or prevalent, a lot of insurance companies could manage this risk through capital reserving and reassurance strategies,” says Brendan Seale, head of environmental, social and governance at Canadian property and casualty insurer Definity. “We look at this issue much more in terms of our day-to-day operations now.”
Lower precipitation levels are contributing to a dangerous fire season for 2026, says Klaus Wilkens, chief executive of reinsurer Munich Re Canada. And catastrophe bonds will probably not be an option to manage the risk, due to the modelling limitations of wildfires, he adds.
“The more the uncertainty prevails, the less likely it is that [catastrophe] bonds will provide high capacities [of risk transfer],” Wilkens says. “If the exposure is increasing, nobody should be surprised if the insurance companies and the reinsurance companies are pricing higher premiums.”
Investors follow
Investors face the same difficulties when pricing the risk of wildfires in portfolios and insurers provide the strongest market signal, says Roger Beauchemin, chief executive of Canadian investment manager Addenda Capital.
“It’s obviously material for a number of issuers,” he says. “[Insurance] is the only place where there’s a price tag attached to it.”
Addenda looks at wildfire risk as a macro resilience question, Beauchemin says: “We think how we can drive private capital into either modifying infrastructure or putting in place infrastructure that creates resilience and allows communities to adapt.”
It’s tempting to continue to push development into areas that are convenient or affordable, but if we look at that in the short-term horizon with affordability in mind, we may be building in risky areas
CatIQ data shows insured losses from wildfires in Canada rose by 1,003 per cent over the past decade, with costs reaching C$8.1bn ($5.9bn) between 2016 and 2025.
Nonetheless, investment continues into highly exposed zones, says Seale.
“There’s a lot of development that’s occurring at the wildland-urban interface,” he says, suggesting that Canada’s housing crisis has driven real estate investment into those zones. “It’s tempting to continue to push development into areas that are convenient or affordable, but if we look at that in the short-term horizon with affordability in mind, we may be building in risky areas.”
Investment decisions are caught in an asymmetric time horizon evaluation, says Don Iveson, executive adviser of climate investing at Co-operators, a Canadian insurer and part owner of Addenda.
“As long as that disconnect persists between short-term insurance pricing cycles and long-term risk pricing cycles for lending, people will get away with some very bad decisions that have been mispriced until it catches up with them,” he says.
Iveson cites a 2025 Canadian Climate Institute report, which shows that 16 of the 20 most at-risk communities for wildfires nationally are in British Columbia, and that those 20 communities account for 92 per cent of projected wildfire risk from new housing built to address the country’s housing shortage.
Assets could face value erosion and eventually a stranded asset problem, he says. “As insurability erodes, bankability erodes. As bankability erodes, the leverage that you could get for an asset evaporates.”
Policy lag
A May 14 report from the CD Howe Institute think-tank says Canada needs an reinsurance backstop for natural disasters, with insurers facing an insolvency risk as losses rise. The Insurance Institute, a professional standards body for the Canadian insurance industry, says the country is the only G7 nation without a backstop.
Investors highlight the need for adaptation over disaster relief and risk transfer alone. “We need to move to prevention because the reaction model of insurance and disaster mop-up is not equal to the challenge,” says Iveson.
We need to move to prevention because the reaction model of insurance and disaster mop-up is not equal to the challenge
In April, the Insurance Bureau of Canada, a trade association for property and casualty insurance, called for the development of homes outside high wildfire-risk areas and investment in resilience, including public-private partnerships, to help fill the infrastructure spending gap.
A Canadian Climate Institute report from February suggests that public infrastructure requires investment of C$4.1bn annually for climate resiliency. It estimates that those investments could save C$8.6bn annually.
“We need to be more thoughtful and more innovative in terms of infrastructure investment that’s going to be more resilient to the effects of climate change,” says Seale.
The response will include reforms to building standard policies and fire safety guidelines, say investors and insurers. The infrastructure resilience funding gap will require blended finance, including capital stacks with different tranches of risk to protect private investors against some of the downside, says Beauchemin.
“We know the math works,” he says. “It’s just a question of finding the projects.”