Canadian Underwriter

IBC finds earthquake coverage gap for homeowners

April 4, 2013   by Greg Meckbach, Associate Editor

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The vast majority of Quebec residents, and most British Columbia residents do not have earthquake insurance but many are under the mistaken impression that standard policies cover it or expect the government will bail them out, an Insurance Bureau of Canada official suggested Thursday.

EarthquakeIBC recently conducted a survey on Canadian attitudes and expectations around earthquake risk, said the bureau’s senior vice president and chief economist, Gregor Robinson.

“Most Canadians expect that, in the aftermath of a major earthquake government will pick up the tab,” Robinson said during a presentation titled P&C Insurance: State of the Industry. “Most assume that their standard home insurance policy covers earthquake risk, which of course it doesn’t.”

Robinson delivered his presentation to more than 150 insurance professionals at Swiss Re’s 28th annual breakfast meeting in Toronto.

Robinson noted Natural Resources Canada estimates that not only is there a 30% probability of a “significant” quake in B.C. in the next 50 years but there is also a 5 to 15% chance of such an earthquake in the Ottawa-Montreal-Quebec City region.

“By significant, that means one that will cause buildings to crumble,” Robinson said, but added insurance penetration is low even in regions where there is such a risk.

As a result, he suggested, there are two risks with this low market penetration, one being the reputation of the insurance industry.

The other risk, he added is “social and economic resilience. It’s about the 55% plus in B.C. and the 90% plus of Quebec residents who don’t have insurance but are going to expect compensation.”

Robinson suggested the P&C industry in Canada as a whole showed improvement last year. The industry-wide loss ratio, which was 64.9% in 2012, had been 68.4% in 2011. Industry-wide, direct written premiums rose year-over-year from $43.6 billion in 2011 to $44.9 billion in 2012.

The combined ratio was 95.4% last year, down from 98.6% in 2011.

“As is often the case, the numbers mask wide diversity in the performance of individual players,” Robinson said, noting that the bottom 25% of companies had a combined ratio of greater than 105.1% while the top 25% had combined ratios of less than 85.1%.

Last year, Robinson said, IBC predicted “the prolonged period of low interest rates and uncertain financial markets would continue, and by and large they did.

Last year, he added, the yields on three to five-year government bonds were, on average, 0.55 percentage points lower than they were in 2011, and this affected the investment returns of the P&C industry.

He added in 2012, insurers were holding a higher proportion of their assets in short-term deposits and stocks. His presentation included a bar graph depicting the industry-wide breakdown of insurers’ investment portfolios.

In 2008, the industry had 6.2% of its investments in common shares, and this increased to 7.5% in 2009, 8.7% in 2010, 8.2% in 2011 and 8.9% in 2012. The proportion of investments in term deposits dropped each year from 2006 (when it was 6.8%) through 2011 (when it was 2.2%) and then increased to 3.7% in 2012.

Roughly three-quarters of the portfolio has been in bonds since 2006, when it was 73.3%. The proportion of investments in bonds last year was 76.5%.