‘Fair amount of uncertainty’ of financial impact of Canadian earthquakes: OSFI deputy superintendent

The financial risk  from an earthquake in Quebec is “a lot bigger than maybe people think,” a Munich Re Canada executive suggested Wednesday, while the head of Aon Benfield Canada suggested Canadians on the west coast “may be” underinsured for the same risk.

“We need to create more awareness” on earthquake risk in Quebec, said Claudette Cantin, senior vice president, chief actuary and chief risk officer of Munich Re Canada, during a panel discussion at Insurance Bureau of Canada’s Financial Affairs Symposium, in reply to a question on whether any risks are under-reinsured.

“The pickup rate on earthquake in Quebec is very small,” Cantin added. “It is small from our own modelling perspective. I think we have a different view from the market and what the exposure in Quebec is, and it’s a lot bigger than maybe people think and I think that this market is really underinsured.”

Cantin was one of three speakers on the panel – titled P&C Insurance Perspectives on Reinsurance – during the symposium. This year’s event was held at the Design Exchange, the former Toronto Stock Exchange trading floor.

The moderator of the reinsurance panel was Jonathan Turner, senior vice president and chief financial officer of Swiss Reinsurance Company Ltd.’s Canadian operations. He asked the panelists how companies view risk in the reinsurance relationship and how important is risk reduction, stress testing and managing earnings.

“If I look at Economical, I think historically our focus was predominantly solvency type aspects, so if you have the ‘big one’ and certainly we have a B.C. presence, what do we look like after that?” said Philip Mather, senior vice president and chief financial officer for Waterloo, Ont.-based Economical.

“How does the reinsurance kick in?” after an earthquake on the west coast, Mather added. “What does it do to the balance sheet and the capital position after? That can change with a company’s appetite, that can change with a company’s strategy, so as Economical is moving down towards a public company future, there has been much more focus on earnings volatility, management volatility in the future, much more focus on how you optimize the reinsurance program.”

Economical is the first federally regulated property & casualty insurance carrier in Canada whose mutual policyholders have voted in favour of demutualization. There are several more steps necessary before Economical could demutualize, but if its demutualization is successful, federal regulations  “basically preclude anything” other than an initial public offering (IPO) of stock, Economical chief executive officer Karen Gavan told Canadian Underwriter earlier.

Earthquake risk has been a focus for the federal Office of the Superintendent of Financial Institutions, said Mark Zelmer, OSFI’s deputy superintendent, regulation sector, during Wednesday’s financial affairs symposium.

“It’s of interest to us not only because of the obvious implications for the P&C industry but obviously there is a link in this respect between the P&C industry and the banking system, because of course if you have an earthquake it is probably destroying collateral value for residential and commercial real estate properties wherever it’s happened,” Zelmer added. He made his comments at a separate financial affairs symposium presentation, titled A Regulatory ‘Walk Down Memory Lane.’

“There are very much financial systemic overtones in an earthquake area,” Zelmer said, referring to OSFI’s B-9 earthquake exposures practices guideline, an updated version of which was released in 2013.

“It requires insurers to have pretty comprehensive policies and procedures in place to deal with the complexities of earthquake exposures with an appropriate level of oversight,” he said of OSFI guidelines.

“Let’s face it,  I know there’s lots of modelling going on in terms of trying to figure out earthquakes and their severity and potential impact but it’s a pretty sophisticated business and there’s a fair amount of uncertainty associated with it,” Zelmer said. “It’s something that we pay a fair amount of attention to and that’s one of the reasons we are expecting companies to file information on this on their exposures to earthquake risk on an annual basis.”

In October, 2013, IBC released a study it commissioned to AIR Worldwide, titled Study of Impact and the Insurance and Economic Cost of a Major Earthquake in British Columbia and Ontario/Québec.

The AIR study essentially predicts damages from two possible earthquakes.

One – the Eastern Charlevoix Crustal Scenario – is 7.1 on the Richter scale and occurs under the St. Lawrence River northeast of Quebec City. The model predicted total direct losses of $49.2 billion and indirect losses of $11.336 billion. The other hypothetical earthquake – at 9.0 on the Richter scale off the west coast of Canada, similar to one that occurred in 1700 – could cause $60 billion in direct economic losses to properties and $1.89 billion in direct economic losses to infrastructure in British Columbia.

“I think as a country we could also be underinsured on west coast quake, purely on the face of deductibles,” said David Sloan, president and CEO of Aon Benfield Canada, on Wednesday during IBC’s Financial Affairs Symposium. “The economic impact of that I think is not fully understood and the personal impact could and will likely be enormous.”

In its 2013 study, AIR Worldwide predicted that road access to Vancouver International Airport could be cut off “during the first few critical days after the earthquake as all of the bridges leading to it are impacted.”

The Vancouver suburbs of Richmond, Delta and Surrey “will be worse hit” because they are “built on silty and sandy sediments that shake more than the rock on which Vancouver itself is constructed,” AIR said at the time, adding that in Victoria, frame houses “will move on their foundations if not bolted down.”

In the eastern scenario, “Québec City and its environs experiences more violent shaking than Vancouver does in its scenario,” AIR Worldwide said in its study. “Modern engineered structures should perform well, but poorly-built masonry buildings in particular will experience serious damage. The historic unreinforced masonry buildings that are so prevalent in Québec City’s upper and lower towns for example, are particularly at risk.”

More coverage of the IBC Financial Affairs Symposium

Reinsurance market has ‘awful lot of choice for buyers:’ Aon Benfield Canada CEO