Canadian Underwriter

Study cautions that Canada not prepared for a major earthquake, both economic and insured costs would be significant

October 29, 2013   by Angela Stelmakowich, Editor

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There would be significant losses if modelled scenarios involving a 9.0-magnitude earthquake off the west coast of Vancouver Island and a 7.1-magnitude quake about 100 km northeast of Quebec City came to be, demonstrating the need for a national strategy on earthquake response, suggests a new report by AIR Worldwide.

The catastrophe modelling firm was commissioned by the Insurance Bureau of Canada (IBC) to analyze the impact of two major seismic events. AIR Worldwide developed the western and eastern scenarios, estimating total economic loss and insured loss for both. The report, Study of Impact and the Insurance and Economic Cost of a Major Earthquake in British Columbia and Ontario/Quebec, was released Tuesday.

The two selected regions are at particular risk as a result of their large population density and elevated level of seismic activity, states the report. “Although these two seismic source zones cover only a small fraction of Canada by area, they impact about 40% of the national population.”

simulated damage of earthquake near Quebec City

Both scenarios are attributable to established seismic sources and similar to earthquakes known to have taken place in the past, the report notes. “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 findings of the peer-reviewed analysis leave “no doubt that Canada is not prepared to handle a major earthquake, which could happen at any time, and that the economic impact would be significant,” notes a statement from IBC.

In its report, AIR Worldwide explains the study is a hypothetical exercise rather than a prediction of future events. That said, the impact of the events and their projected loss costs can be seen as good indicators for the likely outcome of similar events, the company adds.

AIR Worldwide notes that for the western scenario, economic losses would be about $74.7 billion and insured losses would be approximately $20.4 billion; for the eastern scenario, those losses would be approximately $60.6 billion and about $12.2 billion, respectively.

The breakdown for insured losses in both scenarios by peril are as follows:

western scenario – shake, about $17.1 billion; tsunami, approximately $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 expected 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 $62 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 losses are pegged at about $11.3 billion.

“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,” he explains.

Consider some of the specifics with regard to the western scenario. In this scenario, the 9.0-magnitude quake would occur at a shallow depth of 11 km in the Cascadia subduction zone on a weekday in late July, with the epicentre in the Pacific Ocean about 75 km off the coast of B.C. That quake would be felt over much of B.C. and Washington state.

The scenario suggests the following damage:

Vancouver Island – considerable damage to ordinary buildings in areas with the most violent ground motion, and severe damage to poorly built structures; widespread damage to chimneys and some partial collapse of some unreinforced masonry buildings; Victoria damaged by fires following the quake and significant damage from tsunami and landslide to some residential buildings near Esquimalt; substantial landslide damage in the northern part of Victoria; light to moderate damage to commercial and industrial buildings; low to moderate levels of damage to Victoria International Airport, but no major service disruption; moderate damage to components of the Port of Victoria; severe shaking and ground failure in Port Alberni; and severe damage as a result of shaking and tsunami inundation to Nanaimo, located on the east coast of the island. “The extent of the damage anticipated is so large that the port may be out of use for many months.”

City of Vancouver – light damage to low-rise and some mid-rise residential buildings, and commercial and industrial buildings; tsunami-related losses to commercial and industrial property in coastal areas around the University of British Columbia, with business interruption in this vicinity perhaps as long as several weeks; moderate damage (partly attributed to liquefaction) to mid-rise commercial buildings in the south of New Westminster and north of Surrey and Delta; large damage to buildings of eight storeys or more in these areas, particularly losses to contents; substantial tsunami damage to some residential buildings in west Richmond and near the Fraser River; and substantial tsunami damage to commercial buildings in southern areas. “As a result of ground shaking and liquefaction, some roads will be damaged and impassable, water supply and other buried services will be compromised and many bridges will be closed temporarily.”

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

simulated damage of earthquake in Vancouver

That said, study findings demonstrate 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,” Forgeron says.

IBC plans to do its part to advance a national conversation on how to prepare for a mega-earthquake – which is a greater than 1-in-500-year event and exceeds the industry’s capacity to respond. The bureau is committed to working closely with governments, the financial services industry and non-government organizations to ensure a national response framework is in place before such an earthquake hits.

“The study is a valuable tool and will be shared with governments, regulators, disaster preparedness organizations, the banking community, the insurance industry and the public,” Forgeron reports.

Things have changed &n
dash; as has understanding of the potential impact of a major earthquake – since Munich Re released the last study of the economic impact of an earthquake in Canada more than 20 years ago.

Among these changes, the report points to urban and infrastructure development, economic and population growth, advances in earthquake research and building codes, and 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.

Simulated photographs courtesy of the Insurance Bureau of Canada.

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