Catastrophic earthquake could threaten Canada’s p&c industry, government backstop needed for “unthinkable” events: IBC

A catastrophic earthquake could threaten Canada’s property and casualty industry, clearly illustrating the need to have in place a government backstop, Sylvie Paquette, chair of the Board of Directors for Insurance Bureau of Canada (IBC), said following IBC’s Annual General Meeting in Toronto Thursday.

“If there is a big earthquake in Canada, it might drag down the whole industry, so we need a backstop from the government,” Paquette, Desjardins Group’s vice president and CEO of p&c insurance, said in an interview. “There is no country where they have earthquake insurance that is not backed up by the public. The industry cannot own all that risk,” she explained.

“A catastrophic quake could drag down the whole industry through our PACICC (Property and Casualty Insurance Compensation Corporation) commitments,” Paquette said earlier during the meeting. (In the unlikely event of the collapse of a p&c insurer in Canada, the industry-funded, non-profit PACICC will respond to claims of policyholders under most policies issued by p&c companies.)

IBC continues to work “with various levels of government towards a national earthquake strategy,” she told meeting attendees. “It’s clear to all of us that this is something we could not achieve individually.”

Sylvie Paquette, chair of IBCs Board of Directors

The idea is that following a devastating quake, insurers would cover the first portion – say, as an example, $40 billion – and the government would cover the remainder, Paquette (pictured left) told CU.

“We can afford it, the insurance and the insurance industry,” she said of the $40 billion. “But above $40 billion, it will be the government that will pay for that. So the backstop means there would be a limit as to the responsibility of insurers and reinsurers,” she reported.

“We believe that there is definitely a role for government for those events that are sort of unthinkable,” at the level beyond which the Office of the Superintendent of Financial Institutions (OSFI) “has already set pretty stringent capital requirements,” said IBC president and CEO Don Forgeron (pictured below, left).

Noting that OSFI “has some of the most stringent capital requirements for quake anywhere in the world,” Forgeron said in an interview that “we don’t take issue with those. The industry is well-capitalized for a very large quake. Our concern is one of those quakes that goes beyond that, and we’ve seen those happen in different parts of the world.”

IBC president and CEO Don Forgeron

To his mind, “the solution is simply not to raise capital requirements, because if you raise them to that level, well beyond where they already are, you’re inviting all sorts of other problems,” suggested Forgeron. “That capital will find other places to go than here, and, certainly, that’s not a scenario that anybody wants,” he added.

While talks are continuing with governments on the quake issue, Paquette told CU that more work must be done to raise public awareness around a big earthquake’s potential impact.

Asked if the public is aware, she responded “in Vancouver, they are; in B.C. a lot more are.” In the Ottawa to Quebec corridor, however, “it’s still challenging” and “the awareness is really not there.”

If a damaging quake does occur, Paquette said her hope is it will not be so large as to be devastating, but will help increase awareness levels. “Even if we’re trying to educate, it’s tough, because the probability is low and we never had a big one in Quebec,” she added.