How a major earthquake could put cracks in Canada’s financial system

Fear of the “Big One” is never far from the minds of those living on Canada’s West Coast.
The long-anticipated powerful earthquake in the shallow waters off British Columbia is an ever-present threat to coastal cities like Vancouver, Victoria, and Nanaimo. Now, a new report says Canada’s economy could be among its casualties.
The C.D. Howe Institute is urging Ottawa to create a backstop to curb financial fallout in the event of a one-in-500 year earthquake causing more than $35-billion in insured losses. Without such an arrangement, the think-tank says, the knock-on effects of a massive strain on the insurance industry could put Canada’s economy in jeopardy.
“The fault lines from a major earthquake in Canada could quickly spread through the insurance industry and have a systemic financial impact,” said the report’s author Nicholas Le Pan.
A major earthquake would be the largest natural disaster Canada has ever faced, according to C.D. Howe. Natural Resources Canada estimates a 30 per cent chance of a significant quake in B.C. in next 50 years.
A severe 9.0 magnitude earthquake off the coast of Vancouver would cause a loss of about $75 billion, with some $20 billion in uninsured losses, according an industry estimate cited in the report. Another analysis showed a catastrophic seismic event on the West Coast could cause insurance claims to soar as high as $95-billion.
The wildfires that swept across Fort McMurray, Alta. last May currently hold the record for Canada’s largest insured natural disaster. The Insurance Bureau of Canada estimated the damage at $3.58-billion.
BEYOND BRITISH COLUMBIA
The risk of an earthquake with crippling economic consequences is not limited to British Columbia. The report points to significant risk in the Quebec City-Montreal-Ottawa corridor.
Natural Resources Canada pegs the risk of a major quake in the next 50 years between five and 15 per cent. Experts say Quebec and Ottawa would be less resilient than British Columbia because due to their greater number of older high-value buildings and aging infrastructure.
This Insurance Bureau of Canada says only 55 per cent of homeowners in Metro Vancouver have insurance that covers earthquakes. That figure drops to just five per cent in Montreal.
ECONOMIC AFTERSHOCKS
The current capacity of Canada’s insurance industry to handle catastrophic events is between $30 and $35 billion. The report says that level is “manageable for a range of events,” according to industry stress tests reported by the Office of Superintendent of Financial Institutions.
“These confirm that the industry is well able to cover the currently assumed one-in-430 year severity earthquake (some $35-billion),” said Le Pan, who served as superintendent of OSFI between 2001 and 2006. Le Pan also notes that “there is no guarantee that actual experience would not be more catastrophic than these arbitrarily determined ‘severe’ scenarios.”
Beyond the $35-billion threshold, the report says the damage would exceed insurers’ ability to meet policyholder claims. The Property and Casualty Insurance Compensation Corporation (PACICC), which covers claims when an insolvent member company can't make payments to policyholders, would have to step in to pay out the policies of failed companies. Le Pan also notes that “there is no guarantee that actual experience would not be more catastrophic than these arbitrarily determined ‘severe’ scenarios.”
The report argues the industry-funded PACICC would need to be strengthened to cope with the possibility of multiple members under financial difficulty.
While banks and credit unions often include natural disasters as part of their risk assessment, most mortgages do not include earthquake coverage, including those backed by the Canada Mortgage and Housing Corporation.
Le Pan says while policy makers have been attentive to the would-be risks to the economy posed by over-zealous investment bankers since the financial crisis, the risks posed by a catastrophic earthquake are similarly serious, and inevitable.
The report also argues that governments need to do more to raise awareness of earthquake risks, and encourage wider adoption of disaster insurance coverage.
“Formal protection from the impacts of natural disasters is nonexistent,” he said. “Severe quakes would affect all economic players, in particular those who fund or insure commercial, municipal or residential housing infrastructure.”

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