Research funded by the Insurance Bureau of Canada (IBC) has found that a major earthquake – which may be likely in the next half a century – could potentially drive insurers into failure.
The Conference Board of Canada projected the costs of a major earthquake off the coast of British Columbia and found that the financial impact would be devastating for the country’s economy.
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“Preparing Canada for an inevitable earthquake is a priority for our industry because we recognize this is a national social and economic threat,” said Don Forgeron, president of the IBC.
“Under the current regulatory framework, a major earthquake in British Columbia would lead to a chain of insolvencies not only in insurance, but across the financial services sector. This would generate massive losses in Canada’s overall economy,” he said.
The private sector, governments and Canadians must all work together to make sure they are adequately prepared, Forgeron said.
“We agree that both the government and the P&C insurance industry have a role to play to mitigate the risk of exceptionally rare, but also potentially very costly, disasters,” he explained.
Pedro Antunes, deputy chief economist at the Conference Board, said the research aimed to stress-test an earthquake that would result in more than $30-billion in insured losses – the maximum amount that the property and casualty insurance industry can conceivably handle.
There is a 30% chance that a significant earthquake will hit the West Coast in the next 50 years, Natural Resources Canada predicts.
“We wanted to paint a picture of what would happen to the economy, to Canadians at large,” Forgeron said. “This shows pretty clearly that it’s a huge hit in terms of both real GDP, and the other piece is the cost to the federal and provincial treasury for not preplanning.”
The Conference Board report notes that recent earthquakes that have occurred in both Japan and New Zealand are larger than thought possible – suggesting that there is a “possibility of something larger and more devastating” happening in Canada.
As well as the cost to insurers, the research considers the cost of destroyed property, deaths, lost jobs and the efforts to rebuild after a major earthquake.
“We say [that] we can mitigate this risk with some kind of backstop system. And there are backstop systems in some other industries, including the banking industry,” said Antunes, adding that the nuclear and oil and gas industries are other examples in which the private sector has agreements to work with the government in the case of emergency.
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