Canadian Underwriter
Feature

Quake Coverage


October 4, 2016   by Ted Harman, President, Accent Insurance Solutions


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Of all the various types of risks and perils that are covered by insurance, earthquake is one of the least understood perils that brokers insure. The peril is misunderstood because earthquake events causing sufficient damage to structures to warrant an insurance claim are very rare.

While there are approximately 30 earthquakes per month in Quebec, few are detectable by humans. Few perils have such a low frequency and, yet, can also have severity that ranges into the billions of dollars per event.

In February 2015, Insurance Bureau of Canada (IBC) published a report on earthquake in Canada which highlighted information that had been presented at its first earthquake conference in Vancouver in October 2014.

Ted Harman, President, Accent Insurance Solutionsv

Ted Harman, President, Accent Insurance Solutions

The report – Preparing Canada for Earthquake: A National Conversation – describes the potential damage caused by a 7.1 Richter scale event in Quebec’s Charlevoix seismic zone. Direct property losses are estimated at $49 billion, while indirect losses (business interruption) are estimated at $11 billion.

Natural Resources Canada estimates there is a 5% to 15% likelihood that this type of event will occur within the next 50 years. In other words, the country has between a one in 20 and a one in seven chance of a major quake in the next 50 years.

The magnitude of the projected losses – $60 billion – is significant. That would be the equivalent of 25% of Quebec’s annual gross domestic product.

However, only 4% of Quebec homeowners currently insure their dwellings for quake. Therefore, the magnitude of uninsured losses could be substantial. If 20% of projected direct losses are to homes, the uninsured exposure for homeowners alone is $9.4 billion. IBC projects total uninsured losses at $48.3 billion.

The ability of the provincial government to provide aid to uninsured homeowners and businesses will be limited by the effects of the earthquake on the Quebec economy. Overall, tax revenues for the government will be significantly reduced based on lower economic output. At the same time, expenses – notably for the reconstruction of public infrastructure – would rise significantly.

Another area of significant concern for earthquakes is the resiliency of the construction sector – and the ability of building companies to ramp up capacity – to meet burgeoning demand for work subsequent to a major event.

Without a significant addition to construction capacity, it is reasonable to expect that reconstruction efforts subsequent to a major event would last over more than a decade.

For example, Christchurch, New Zealand – which was hit by a series of earthquakes five years ago – is a good example of this phenomenon. Tim Grafton, chief executive of the Insurance Council of New Zealand, presented compelling data at an IBC conference regarding construction capacity and the duration of the claims horizon. Grafton delivered his presentation, Preparing for the Long Haul – The New Zealand Experience, at IBC’s quake symposium in 2014.

Grafton said that he expects that commercial rebuilding efforts – after the February 22, 2011 earthquake that caused NZ$40 billion in damages – will continue until at least until 2020. At press time, the New Zealand dollar was trading at C$0.96.

In Canada, current policy wordings do not foresee anywhere near the duration of loss that was experienced in New Zealand, particularly for commercial property owners. The insurance industry will have to address this exposure in the future, perhaps by offering extended business interruption coverage with longer claim horizons.

As well, the provincial government, insurers and construction unions need to begin planning now for how they will react in these circumstances.

In October 2015, IBC sponsored a survey of consumers in Quebec to measure the perception of risk and consumer knowledge of their insurance coverage regarding earthquakes.

In the SOM survey, only 9% of Quebec respondents believed they are at risk of experiencing an earthquake. One in three believe they are already covered by their policy for earthquake, when, in fact, only 4% of Quebec homes are covered. This compares to 45% of British Columbian homes insured for earthquake.

Clearly there is a need for a significant public awareness campaign to be undertaken to sensitize Quebecers to the level of risk to which they are exposed.

It is reasonable to expect homeowners will turn to their insurers seeking compensation for losses, even if the coverage is not provided by their contracts. This type of situation is not unprecedented.

Indeed, after the ice storm in 1998, many insurers were asked to read in coverages that were not in their contracts. More recently, after the 2013 flooding in High River, Alberta, insurers were asked to apply sewer back-up coverages to losses caused by flooding, even though overland flood was an excluded peril in all homeowner policies.

With a peril that has an extremely low frequency, the perceived risk of an event becomes remote. Clients will often reject the addition of earthquake to their policy to save on cost and because they do not believe a significant earthquake will happen in their lifetimes.

That said, the need to address the issue with clients is very real. Always excluded from base contracts, earthquake is a peril that should be added to a policy to ensure the client has proper protection.

Clients may be required to accept significantly higher deductibles compared to other coverages; in commercial lines minimum deductibles of $50,000 or $100,000 are common. In personal lines, deductibles can range from 4% of building value to 10% of building value, often 20 to 40 times the standard policy deductible. Once informed of the risk and confronted with the fact that the risk is excluded from their policy, the client can make an informed choice regarding adding the coverage.

What should brokers do to ensure that their clients are properly apprised of the risk and the fact that the coverage is not included in their policy? In short, brokers should offer the coverage on every new policy sold. They should also consider writing to every existing client with a homeowner, tenant, condo or commercial building policy.

In their correspondence, brokers should consider explaining the risk and offering to add earthquake coverage to the policy. When weighed against potential catastrophic loss, a premium of $20 per month can seem pretty appealing.

If a client refuses to accept the coverage, the broker should ensure the client’s file is appropriately documented to indicate the offer and the refusal of the client to add the coverage.

—Ted Harman, President, Accent Insurance Solutions


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