OSFI expects P&C insurers to start looking at earthquake exposures on a national basis

Canada’s federal solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), is advising property and casualty insurers to be prepared to start looking at their earthquake risk exposures on a national basis.

OSFI assistant superintendent Mark Zelmer outlined the new expectation in notes to his speech at the 2012 Property and Casualty Insurance Industry Forum in Cambridge, Ontario on May 30, 2012. He said the new approach would be phased in over 10 years to give companies time to adjust how they calculate their probable maximum losses (PML) arising from an earthquake event.

The shift in expectation would affect P&C companies that have earthquake exposures in more than one region of Canada — for example, in both B.C. and Quebec.

“That does not mean that we expect companies to be able to cope with an event in B.C. and an event in Quebec at the same time,” Zelmer said.

“This means that we will expect you to compute the probability of an earthquake major loss, assuming that an event could take place in either location, bearing in mind where your exposures are located and that the probability of an event in both locations is highly remote.

“As a result, for companies with similar exposures to earthquake zones in both B.C. and Quebec we expect the required solvency resources are likely to increase by less than 40%.”

Companies that only have exposures to one region (B.C. or Quebec) will not be affected by the changes, he added.

Zelmer said OSFI is refreshing its guidance on earthquake exposures to reflect lessons learned and technological changes over the past 14 years. In 1998, OSFI established a target for P&C companies to move to a one in 500 year probability of a major loss (PML) from earthquakes by 2022.