Shaking Foundations

The Insurance Bureau of Canada (IBC) has released a study conducted by AIR Worldwide that has painted an unsettling picture of the insurance industry’s preparedness for “the next big one.” Findings of modelled scenarios of a 9.0-magnitude earthquake off the west coast of Vancouver Island and a 7.1-magnitude quake about 100 kilometres northeast of Quebec City are clear: Canada is not prepared to handle a major earthquake, the resulting economic and insured costs of which would be significant.

By significant, catastrophe modelling firm AIR Worldwide notes in its report, commissioned by IBC, that for the western scenario, economic losses would be approximately $74.7 billion and insured losses about $20.4 billion. For the eastern scenario, those losses are estimated at $60.6 billion and $12.2 billion, respectively.

The report notes that both scenarios are attributable to established seismic sources and similar to quakes known to have taken place in the past.

“Although these two seismic source zones cover only a small fraction of Canada by area, they impact about 40% of the national population,” states the peer-reviewed analysis, released October 29.

IBC notes that the scenarios – described as a hypothetical exercise rather than a prediction of future events – demonstrate the pressing need for a national strategy on earthquake response.

Long reach of a major quake

“Earthquakes of the magnitude modelled are low-frequency events in these locations, considered to have a 0.2% probability of occurring in any one year, but sufficiently threatening and devastating to warrant prudent planning and preparation now,” the report notes.

A study published this spring in the Canadian Journal of Earth Sciences dated the disturbances in sedimentary layers off the B.C. southern coast over the last 11,000 years, identifying 22 earthquake shaking events. “Even though it could be tomorrow or perhaps even centuries before it occurs, paleoseismic studies such as this one can help us understand the nature and frequency of rupture along the Cascadia subduction zone, and help Canadian coastal communities to improve their hazard assessments and emergency preparedness plans,” Audrey Dallimore, an associate professor at Royal Roads University and one of the authors of the study, said at the time.

“The risk of a major earthquake affects us all, not just those living in high-risk areas,” IBC president and CEO Don Forgeron says in a statement. “Events of this magnitude have a domino effect on the Canadian economy triggered by property damage, supply chain interruption, loss of services, infrastructure failure and business interruption.”

The AIR Worldwide report provides estimates of insured losses by peril:

western scenario — shake, approximately $17.1 billion; tsunami, about $1.1 billion; fire following the event, $337 million; and liquefaction and landslide, about $1.9 billion.

eastern scenario — shake, about $11.5 billion; fire following event, approximately $628 million; and liquefaction and landslide, $56 million.

With regard to economic losses, for the western scenario, the perils of shake, tsunami, fire following event and liquefaction and landslide would produce direct loss of about $58.6 billion for property, about $1.9 billion for infrastructure and about $1.5 billion for public assets. The total direct loss would be around $62.0 billion, while indirect loss is pegged at about $12.7 billion.

For the eastern scenario, the perils of shake, fire following event and liquefaction and landslide would produce direct loss of about $45.9 billion for property, almost $2.0 billion for infrastructure and about $1.4 billion for public assets. The total direct loss would be approximately $49.3 billion, while indirect loss is estimated at about $11.3 billion.

Speaking in advance of the report’s official release, Gregor Robinson, IBC’s chief economist and senior vice president of policy, said during the National Insurance Conference of Canada in Gatineau, Quebec that shaking would account for 82% of total direct losses from the event in the western scenario, and for 98% of direct losses in the eastern scenario.

Overall, Robinson said, such an event would also have an extreme impact on supply chains and the overall Canadian economy, as roads, pipelines and airports would all be affected.

Canada’s Office of the Superintendent of Financial Institutions (OSFI) released the final revised version of its Earthquake Exposure Sound Practices Guideline (Guideline B-9) in late February. The guideline, which takes effect in January 2014, is meant to, among other things, strengthen the principles-based approach to managing earthquake exposure; update the description of best practices in earthquake exposure management; and spell out the Minimum Capital Test Guideline.

“The revised guideline will help Canadian insurance companies continue to be well-prepared for the financial consequences if a major earthquake were to occur in Canada,” Mark Zelmer, assistant superintendent of OSFI’s regulation sector, noted in a letter at the time.

Call for collaboration

Things have changed – as has understanding of the potential impact of a major earthquake – since Munich Re released the last study on the economic impact of an earthquake in Canada more than 20 years ago, notes AIR Worldwide.

Among these changes, the report cites urban and infrastructure development, economic and population growth, advances in earthquake research and building codes, as well as legislative changes. “Furthermore, recent experience has shown that risk such as tsunami, liquefaction and business interruption may not have been fully understood or taken into consideration when assessing earthquake risk in the past,” the report states.

“Insurers, governments and all Canadians have a responsibility to prepare,” Forgeron says. “If a mega-earthquake should strike in a densely populated area, insurance alone will not pay for all the damage,” he emphasizes.

On a more positive note, study findings indicate that mitigation – such as more resilient buildings and infrastructure – “can further reduce economic losses by a third or more. That’s why we are calling for an integrated preparatory approach to the earthquake threat,” says Forgeron.

Figures in the report related to indirect losses to infrastructure for the eastern scenario, for example, show that airports disruption would result in indirect loss (without resilience) of $32 million, $163 million for sea ports disruption, $61 million for roads disruption and $97 million for railroads disruption.

However, it adds that indirect loss (with resilience) would change those figures to $16 million, $82 million, $11 million and $36 million, respectively.

Jayanta Guin, senior vice president of AIR Worldwide, notes that as a result of its collaboration with IBC, its “updated Canadian earthquake model provides the most complete view of seismic risk to residential, commercial and industrial properties and infrastructure.” The model, set for release in 2014, will include fire spread risk, updated models for tsunami and liquefaction, and an earthquake-triggered landslide model.

AIR Worldwide notes that study findings are “intended to raise awareness and to serve as a valuable tool for the insurance industry, government agencies, regulators, disaster preparedness organizations and the public in planning for, and mitigating, the risk from future earthquakes in Canada.”

In that vein, Forgeron says that the research “will be shared with governments, regulators, disaster preparedness organizations, the banking community, the insurance industry and the public.”