December 4, 2014 by Ronan O'Beirne and Jeff Pearce
Montreal. All those pretty, spiral staircases and old buildings. Real heritage structures. Beautiful place, one of the jewels of the country. And oh, so vulnerable. Then one day, there’s the shaking, the swish pan and rumbles, like a huge, angry toddler is erasing a picture on the Etch-a-Sketch of the world. Brick and unreinforced masonry crash down and crumble. Then you get what the scientists like to call “liquefaction”—soil loses its strength, and the moisture in it is churned around. Bridges and overpasses collapse. Water lines are broken. Buried gas lines get damaged and spark multiple house fires.
“Don’t run outside,” says Dr. Kristy Tiampo. Things often fall off buildings, and they could fall onto you. “You want to be inside—usually.” Instead, you should get under a desk or a table for protection. Tiampo knows all about earthquakes: She’s a professor with the Department of Earth Sciences at the University of Western Ontario. She’s also on the management committee of the Institute of Catastrophic Loss Reduction. But what was unusual about her advice is that she was giving it in Toronto.
We’re well-accustomed to hearing about the danger in British Columbia. Last month, when the Insurance Bureau of Canada hosted a quake symposium in Vancouver, even the Minister of Public Safety and Emergency Preparedness, Steven Blaney, showed up to profess solidarity with the industry. IBC officials pointed out that Canadians aren’t ready, but at least, in B.C., they know what they’re not ready for. In Montreal and other parts of Eastern Canada, experts say, not nearly enough people know that there’s a real risk of earthquakes. It doesn’t need to be top of mind, but it needs to be on the radar. At a CRU Adjusters breakfast event in Toronto’s Trump Tower, Tiampo drove the point home.
Read: Insurance Industry Not Prepared for Montreal Quake
“I am concerned about earthquakes everywhere,” she told Top Broker. “One of the things that I think we have to be very careful of is assuming that we know everything about when and where larger earthquakes are going to occur because that’s what we’ve seen in the past. The earthquake cycle is very long. It’s very long in places like B.C. and in Montreal. It’s hundreds of years, if not thousands of years in time. It takes a long time to see a complete full earthquake cycle, and every earthquake cycle has some variation—just as any natural process does—has some variability in it.”
Because of the long span between earthquakes and the short period of history for which we have good records, nobody has recorded the full quake cycle. Back in July, risk modeling firm AIR updated its earthquake model for Canada, but, as Tiampo points out, the company can plug in the right statistics for what’s been seen before, “with variability that they’ve put into it, hoping they’ve covered all the possible choices.”
She says we could see smaller quake events of magnitude 6.0 or 6.5 in Eastern Canada down the line, instead of the more dramatic 7.0 that AIR predicts will take place eventually. “That’s the biggest one we’ve ever seen in Eastern Canada, but they chose that 7.0 in the exact same place as it occurred a couple of hundred years, 400 years ago. Well, what if an earthquake a little bit smaller than that, but still quite large—like a 6 or a 6.5— happens in a different place, right? What if it happens nearer to people? What if it happens under a city? What if it happens near a significant infrastructure? Which we have in so many places in the East now, it’s a very built-up place.”
“Personal lines homeowners is not an in-depth sale for any broker. But you have to make it an in-depth sale if you’re in an area of earthquake risk.”
And what’s there isn’t built as well as it is in B.C., says Carol Jardine, formerly of TD Insurance and CUMIS, and now heading up her own consultancy. “The sort of basic work that’s been done years ago in B.C. has not been done in Montreal and Quebec: the infrastructure, the building codes, the by-laws… We may not be underwriting appropriately within that market for the true earthquake exposure.”
We could be, in effect, missing out on key locales because “we’ve convinced ourselves that those are not going to happen— we haven’t prepared for them properly, because we’ve prepared for this really nice big one in a different place,” Tiampo adds. Authorities—and insurance companies—won’t be able to respond quickly enough to such a catastrophe.
Jardine notes that, in addition to having a responsibility to their clients, insurers are also accountable to the Office of the Superintendent of Financial Institutions, which “places a severe emphasis on board and senior management to make sure that there are earthquake practices and procedures.”
In point of fact, OFSI’s revised B-9 Guideline, “Earthquake Exposure Sound Practices,” came into effect at the start of this year. Among other things, they set out the factors to be considered when calculating probable maximum loss (PML). When it announced its update, OFSI declared that it recognized that insurers “may have differing earthquake exposure risk management depending on, among other factors, their size; ownership structure; nature, scope and complexity of operations; corporate strategy; and risk profile.” Still, they’re “expected to report certain earthquake exposure information to OSFI on an annual basis.”
Yet “so many insurance claims executives, we found when we’ve gone to speak to them, are highly dependent on external resources,” says Jardine. “They’re assuming that somebody else, the cavalry, is going to come around the corner. They’re dependent on the availability of airports and transportation into communities, and it’s a highly reactive plan. It’s really quite thin.”
Jardine says she was surprised by the alternative scenario that came out of last year’s Insurance Bureau of Canada study for a big quake in the east, one that could hit 7.1. “This one surprised me, because I don’t think we spend enough time in Canada looking at the impact of an Eastern Canada quake. Everybody is focused on B.C. When you look at this in Eastern Canada, I mean just a smaller quake in Eastern Canada, because the buildings have not been reinforced, because it hasn’t been a concern for insurance companies, surprise! Twelve billion dollars in insured losses, 61 billion in total losses.”
The total losses come largely from the hits that infrastructure in the area would take, as the IBC/AIR study described in stark terms. “Commercial buildings in and around the Place Fleur de Lys are likely to suffer moderate to extensive damage due to severe ground shaking. The highway bridges crossing the St. Charles River on Route 440… and the highway and railway bridges on Route 136… as well as the one on Route 175 (Autoroute Laurentienne) are likely to suffer moderate to extensive damage. The closure of these bridges, if required, will significantly hamper the traffic and transportation between Quebec City and the populated districts of La Cite-Limoilou… Most seriously, the two bridges spanning the St. Lawrence River will be severely impacted, and may be closed to traffic for a considerable amount of time.”
Brokers should be alarmed that scenarios like this haven’t been a concern for the insurance companies, Jardine says. “I’m worried that they’re hoping the insurance companies are going to do the right thing when the event happens, and we’ve seen that in other catastrophic events. The brokers hope that they’ve done the right thing.
“Personal lines homeowners is not an in-depth sale for any broker. But you have to make it an in-depth sale if you’re in an area of earthquake risk,” she adds. “I think one of the big questions brokers need to ask is, ‘What will the underwriters be doing when the earthquake hits? So, are they prepared? Do they have a plan? What are the coverage decisions that they’ve already decided?… Is the underwriter going to cover losses? Which losses are they not going to cover? What are they going to do with large deductibles?’”
Read: AIR Releases New Earthquake Model for Canada
The Toronto seminar was the fourth in the CRU Adjusters’ series, and Jardine says the industry just might be waking up. “There’s been more engagement, first of all with OSFI releasing the B-9 last year, so now more people are where they need to have a strong claims planning program. [And] we’ve partnered with the ICLR, so with the scientific evidence being presented, more people recognize that it’s not just a conversation for claims executives or for risk underwriters, but it’s actually a conversation to get ready for preparedness. I think everybody’s struggling with this.”
The IBC, for its part, is trying to get the conversation going across the country. The Great British Columbia Shake-Out, which the bureau sponsored, wasn’t the only event of its kind last month. Quebec’s “Grande Secousse,” now in its second year, expanded from the Charlevoix region to include 150,000 participants across the province, in major cities like Montreal, Quebec, Sherbrooke and Laval. If those numbers are encouraging, IBC’s polling isn’t: 84 percent of Quebecois respondents in a recent survey said they don’t feel their home is at risk of being struck by a tremor.
“What we know from the experts… the probability of a major earthquake in Eastern Canada is five to 15 percent within the next 50 years,” says Pierre Babinsky, director of communications and public affairs for the IBC. “So it’s not a certainty, but it’s certainly a possibility. And we feel people need to prepare for that.”
But he acknowledges it’s a hard sell in a province not usually associated with quakes. Earthquake insurance penetration is in the low single digits in Quebec, because people either don’t see the risk at all, or see it but don’t think it justifies the premiums. While there’s some onus on homeowners to do their homework, it’s a two-way street.
“People need to be… engaged in that discussion with their brokers, with their insurer, in terms of what they feel they might need to adequately protect their family,” says Babinsky, and “the industry has to offer a product that is relevant to the needs of its customers.”
“I don’t think we spend enough time in Canada looking at the impact of an Eastern Canada quake.”
Daniel Mirkovic, president and CEO of Vancouver’s Square One Insurance, says the industry can’t sit around and wait for a client to bring it up. “A lot of it comes down to… whoever’s speaking with the client, whether that’s an independent agent or a broker or a staff employee at a direct writer… [should] explain to them the earthquake risks that exist across Canada, as well as educate them on how affordable it can be in most parts of Canada to add earthquake insurance to your home insurance policy.” (In a news release last summer, Square One noted that premiums can be as low as $15/year in calm, steady Toronto, or as much as $515 in Richmond, B.C. for a $300,000 home.*)
But insurers also need to back up their talk with claims preparedness. At the CRU symposium in Toronto, Jardine asked the audience how ready they felt for an earthquake in Montreal, on a scale of one to 10. The crowd was slow to show their hands. “I feel like we’re less than a five,” Jardine said. “And what are our customers or your insureds thinking about when they’re buying earthquake coverage… ‘When it happens, man, my insurance company is going to be there for me.’ And if we’re only at a five, shame on us.
Earthquake coverage isn’t a simple yes/no question. A homeowner might feel safe and secure having shake coverage, but should read the fine print: it might only cover structural damage from the actual shaking. Half the battle with an earthquake is what comes next: not just the standard aftershocks, but knock-on hazards like fire. (In the 1906 San Francisco quake, much of the damage came from fires that started in ruptured gas lines.)
In the worst-case scenario—the Hollywood scenario—there’s also the risk of a tsunami. Tsunami risk has gained a higher profile in the past decade, thanks to the 2004 Indian Ocean earthquake and the 2011 Japan quake, and while the industry has an eye on it, it’s not as big a threat as quakes.
At the CRU symposium in October, an audience member asked Kristy Tiampo if the lesser-known risk of a smaller, non-subduction earthquake north of Vancouver carried the same tsunami risk as “the Big One.”
“Tsunami risk is much lower with those,” she said. “It’s generally recognized that you need a certain amount of energy to go into the water to create a tsunami wave,” and a small thrust quake just doesn’t produce that kind of energy. That said, “Sometimes we see small tsunamis generated, for example, off Hawaii from landslides and lava flows and small earthquakes. But they generally don’t produce something that’s going to cause a serious amount of damage.”
Which is probably good, because for the Canadian insurance industry, tsunami is like overland flood: untouchable, for now. “Right now, there’s a lot of work in the industry—it’s something we’re working on, too—in terms of offering flood insurance to Canadians, because in those situations, currently, there’s coverage under the Disaster Financial Assistance programs, available in all of the provinces,” says Daniel Mirkovic of Square One Insurance in Vancouver.
“But, as we saw in Calgary, as well as in Toronto, those programs have some challenges of their own. So there might be an opportunity for the insurance industry to offer clients some form of better coverage.”
*An earlier version of this article mistakenly presented these numbers as monthly, not annual, rates.
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the November 2014 edition of Canadian Insurance Top Broker magazine
This story was originally published by Canadian Insurance Top Broker.