The devastating wildfires which have swept through the Canadian province of Alberta, and particularly hit the city of Fort McMurray, northern Alberta’s largest municipality, are anticipated to become Canada’s most costly natural disaster.
As of 18 May, the fires, which were first spotted on 1 May, are still blazing. Reports overnight on 16/17 May indicated that the fires had changed direction, moving towards the oil sands camps north of Fort McMurray, and necessitating the evacuation of up to 12,000 oil sands employees. The fires may take months to contain and extinguish.
For now, the risk of flare-ups remains high, and with concerns about the very poor air quality, it is difficult to predict when it will be safe enough to allow the 100,000 displaced residents of Fort McMurray to return home. The area affected by the fire is vast, over one million acres (1865 square miles).
As the domestic and global insurance market assesses the impact of the fire, early estimates predict that insured losses could range from C$2.9bn to C$9bn (US$2.3bn – US$7bn).
The potential cost of this loss far exceeds Canada’s most expensive wildfire to date, Slave Lake, in 2011, in which 522 homes were destroyed at a cost of C$742m (US$566m). The recent wildfires are also likely to eclipse the ice storm that struck Southern Quebec in January 1998 (insured damages of approximately C$1.9bn (US$1.5bn)) and, more recently, the flooding in Southern Alberta in July 2013 which caused roughly C$1.8bn (US$1.4bn) in insured damages, as Canada's most costly natural disaster.
The sequence of events
The fire was first discovered by fire crews on Sunday 1 May. It was initially thought to be manageable, but by the evening of Monday 2 May it had doubled in size. By the evening of 3 May, more than 88,000 people had been evacuated from Fort McMurray. By Thursday 5 May, more than 1,100 firefighters, 145 helicopters and 22 air tankers were deployed, battling 49 fires.
A week after the fire started, the changing wind direction, a drop in temperatures and some light rain enabled firefighters to arrest the progress of the fire. However, on the evening of 16 May the fire changed direction again, and started moving north towards the oil sands production sites.
On 9 May it was confirmed that 2,600 structures had been destroyed and about 100,000 people had been evacuated from Fort McMurray.
Fortunately the fire has not reached the nearby oil sands, one of Canada’s most important oil production facilities. However, due to the displacement of the evacuated workforce, and in regard to initial safety concerns, production was shut down at a number of facilities for at least a week. Whilst some production facilities have now resumed limited production, it is expected to take some weeks for full production to resume particularly in light of the further evacuation of the oil sands camps north of Fort McMurray, which has necessitated the shut down of more production sites.
The oil sands of Alberta contain some of the largest and most developed production facilities of their kind in the world. They have been described by Time Magazine as “Canada’s greatest buried energy treasure”. Oil sand is a naturally occurring mixture of sand, clay or other minerals, water and bitumen. It needs further treatment before it can be sent to refineries to produce useable fuels. Alberta’s multi-billion dollar oil sands industry uses the most technologically advanced production processes and the oil sands industry is a significant factor in Canada’s economy.
It is too early to assess when residents of Fort McMurray can hope to return; the authorities are still waiting to confirm whether there is any ongoing risk from wildfire, as well as making repairs to critical infrastructure, restoring essential services, securing hazardous areas, and organising for local government to be re-established. Air quality concerns are also an issue, with readings at 38, where the normal maximum tolerance is 10, causing officials to caution residents against attempting to return to the area.
In what will be a significant blow to plans to restart and increase oil production the fire, travelling at 30-40 metres per minute, has moved north of Fort McMurray, causing renewed concerns for the safety of oil workers in the oil sands camps. Precautionary evacuation orders were issued to 8,000 people in all camps to the north of Fort McMurray and south of Fort McKay, in addition to 4,000 who were already asked to leave. Suncor, one of the largest producers in the area confirmed that it had started a “staged and orderly” shutdown of its base plant operations.
Reports suggest that none of the production facilities themselves have been damaged, however several camps have been destroyed.
Miraculously, no injuries or fatalities have been reported as a direct result of the wildfires; two deaths reported being as a result of a car accident during the evacuation, are so far the only reported loss of life.
The early assessment of damage to Fort McMurray indicates that approximately 20% of the city’s buildings are severely damaged or destroyed, with the core of the city remaining relatively intact. Official estimates suggest that 70% of the housing in the residential Beacon Hill area was lost, 50% in Abasand, Waterways has lost 90%. In total, more than 2,600 structures have been lost, but almost 25,000 have been saved, including the hospital, municipal buildings and operating schools. Much of downtown and water treatment plants are also intact.
That said, due to the oil industry presence, housing in the area is expensive and homes have high valuations; in 2006 real estate prices in Fort McMurray were the highest in Alberta, but experienced a sharp downturn recently due to the drop in oil price.
The latest insurance position
Current estimates predict the losses could range from C$2.9bn to C$9bn (US$2.3bn – US$7bn), making this the largest natural catastrophe in Canadian history.
Canadian primary insurers typically adopt a conservative approach to reinsurance; retentions are low, and it is anticipated that a significant percentage of the insured losses will be borne by reinsurers, with ILS and Cat Bonds also bearing some of the costs.
As a result of the level of reinsurance programs, it is not expected the wildfires will have a major impact on Canadian property and casualty insurers.
Residential and Commercial Property Insurance
At this stage it is anticipated that the bulk of the insured losses will be in relation to property damage, both residential and commercial, in the Fort McMurray area. The cost to insurers is expected to be higher than for previous Canadian wildfires (such as Slave Lake), due, as mentioned, to the number of structures damaged or destroyed and the comparatively high property prices in the area. Also, the extended period during which property owners are unable to return to their homes will generate ongoing claims for living expenses, which are typically covered in Canadian property policies.
Fortunately, the wind and firefighting efforts have thus far prevented the fires from reaching the oil sands, however, there has been damage to infrastructure serving the region.
Domestic insurers report that they already have disaster responses processes in place. Alberta accounts for almost 60% of all insurance claims resulting from severe weather events. Local insurers report that the province has seen more natural disasters over the last 10 years than ever before.
Business Interruption - Oil Production
Production at all major oil sands sites was cut back significantly, with the daily output reportedly dropping by a million barrels (some 40% of Alberta’s output), and it is anticipated that it will take some time for the facilities to be fully operational. Safety of all oil sands workers remains a priority, and with the workforce displaced many producers will only be able to gradually increase production once all the necessary safety checks have been completed.
Goldman Sachs estimates that the lost production, assuming companies can ramp production back up over 10 days, will equate to 14 million barrels. An IHS Energy report on 17 May stated that some C$985m (US$751m) in oil sands production has been lost, with 1.2m barrels per day lost over two weeks.
A number of issues, including the impact of the displacement of key staff and the possibility of damage to electrical networks, buildings, and pipelines, still need to be assessed. Ramping up production is not necessarily a quick process, and operations will only come on line gradually. Some areas are still subject to a mandatory evacuation order because of the risk of further fires. Whilst it is anticipated that there will be significant business interruption losses arising from the oil sands industry, it is as yet too early to predict their scale and the extent of insurance recoveries will depend on the scope of cover in place. Issues regarding the extent of and recoverable loss of production income arising out of direct damage to owned property will most certainly arise. In this regard, the extent to which contingent business interruption losses arising from damage to non-owned infrastructure in the broader community or denial of access are covered will depend upon individual policy considerations.
As outlined above, the Canadian primary market typically operates with low retentions; the bulk of the insured losses are expected to hit the global reinsurance markets, including retrocession, ILS and Cat bond markets. Morgan Stanley estimates that global reinsurance and retrocession capacity will bear over 70% of the insured losses. Based on the Morgan Stanley estimates, the reinsurance markets could bear a total of between C$2.6bn to C$6.5bn (US$2bn to US$5bn) of the loss. In a year that has already seen a number of natural catastrophes which have impacted on global reinsurers, these losses will not be insignificant. It is to be expected that the usual reinsurance issues, around the number of events (at one point there were 49 fires blazing around Fort McMurray), for the purposes of aggregation, as well as issues arising in respect of hours clauses will cause reinsurers to carefully review their policy wordings in this respect.
Some reports indicate that combined ground-up loss estimates will take some insurers through the top of their reinsurance programmes, as initial loss estimates are at the upper end of the provided ranges. This could also present insurers with some problems on renewals.
It is still too early to make any confident predictions as to the viability of any recovery actions. Should a potential target become apparent as the investigation progresses, the viability of recovery actions will need to be assessed based upon what (if any) liability insurance those targets have in place.
The identities of the potential targets will become apparent as the investigation into the cause of the fire progresses, and insurers will wish to keep the position regarding potential subrogated recovery actions under review.
Clyde & Co's response to the incident
Clyde & Co has established a response team to handle queries arising from the Wildfires. Led by our offices in Canada and the US, our Global Property, Subrogation, Reinsurance and Energy teams are working closely to both monitor the situation as it develops and to assist our clients in Canada, the US and globally.