P&C industry must start dialogue on major earthquake risk in Canada, IBC says

NICC 2013- A major earthquake is the most significant threat that the property and casualty insurance industry in Canada faces, and creating a dialogue with governments and consumers is critical for the industry’s continued solvency, the Insurance Bureau of Canada says.

At the National Insurance Conference of Canada in Gatineau, Que. Monday, IBC’s senior vice president of policy and chief economist Gregor Robinson gave the highlights of a study commissioned by the organization on how Canada could stand up to major events on both sides of the country.

Modeler AIR Worldwide created two scenarios for the study – one Western and one Eastern. The study is based on a one in 500 year return period, the regulatory standard for which insurers in Canada must be capitalized to handle.

In the Western scenario, a magnitude-9.0 quake would strike 75 km off the coast of British Columbia in the Cascadia subduction zone in late July. That quake would be felt as far as 400 km, or throughout most of B.C. and Washington state, creating long, seismic waves that would be especially damaging to tall buildings.

While the total cost of such an event will be outlined when the full IBC report is released at the end of October, Robinson said that shaking would account for 82% of the total direct losses from the event.

That modeled scenario would also cause significant liquefaction, when the soil becomes so soft that it can no longer properly support buildings or other infrastructure, such as bridges. Combined with landslides, liquefaction would account for roughly 10% of total direct losses, particularly in the Fraser River delta, according to Robinson.

The scenario included in the study would also lead to a tsunami that would generate waves of about 2m once they reached Victoria, and slightly less for Vancouver, according to Robinson. The tsunami would account for about 7% of total direct losses.

Overall, 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, he noted.

In the Eastern scenario, a 7.1-magnitude earthquake would occur 10 km beneath the St. Lawrence River, about 100 km from Quebec City in December. It would be largely felt throughout Quebec, Ontario, New Brunswick and New England in the United States.

Shake would account for 98% of total direct losses, and telecommunications and electrical infrastructure would be majorly affected.

With an epicentre so close to such an old city, major fires would also account for 5% of total insured losses, and 1.5% of total direct losses, according to the study’s scenario.

While major, the two scenarios included in the study wouldn’t be enough to bring the industry to its knees. “We can take comfort from the fact that our industry is capitalized and financially prepared to withstand earthquakes of the size modeled,” Robinson said.

Still, the industry can’t just do nothing, IBC says.

In a separate presentation during NICC Monday, Don Forgeron, the organization’s president and CEO, said that having an institutional framework, aside from private insurance alone, will be critical for addressing the risk.

“These are just scenarios, but the real earthquake of the right magnitude in the right place presents the greatest existing risk to our industry and perhaps the country,” he said. “It presents as a catastrophe that could destroy our communities and segments of our industry, and yet, we’re not ready.”

One positive step forward would be a government backstop program for earthquake damage. One way to fund it could be through a levy supported by the insurance industry, Forgeron said.

While governments must take a leadership role in addressing ageing infrastructure as well, the industry must also educate consumers who are in seismic zones to take up coverage, he added.

“Simply put, if we do not increase the number of Canadians insured against earthquake, we will not solve this problem,” he said, adding that that was one reason IBC commissioned its study and plans to promote its findings to various levels of governments and consumers in the coming months.

The National Insurance Conference of Canada runs through Tuesday.