Insurers call for earthquake partnership

The federal government should examine public-private partnerships in other jurisdictions to address earthquake risk here, the Insurance Bureau of Canada says.

In a letter to the federal Department of Finance, David McGown, IBC’s senior vp of strategic initiatives, said the risk of a large earthquake is compounded due to high-value homes and businesses in earthquake-prone areas in Vancouver and the Quebec City- Montreal-Ottawa corridor.

“An event would overwhelm the industry’s capacity to meet its obligations and could cause widespread insolvencies amongst insurers, leaving Canadians without insurance protection precisely when it is most needed,” Mr. McGown said.

And he said the adverse financial ramifications wouldn’t stop there.

“Because of the linkages . . . between insurers and the wider financial sector, there is a real risk that the initial shock could trigger financial contagion, impairing economic growth for a decade or more.”

The IBC said that in Japan earthquake risk is shared in layers between insurers and the federal government, depending on the magnitude of the event. For large events the government absorbs most of the cost and for small and mid-sized quakes insurers bear the brunt of the losses.

“By improving insurers’ financial capacity and limiting insolvency risks, the arrangement has enabled insurers to absorb more small and frequent losses and provide lower and more affordable earthquake insurance premiums to consumers,” Mr. McGown said.

In fact, public-private partnerships in Canada are already in place for nuclear disasters, oil spills and railway accidents.

And while capital requirements are largely sufficient for insurers to withstand a catastrophic event, the lack of solutions for events where losses exceed insurers’ capital reserves could pose a threat to the country’s financial stability, Mr. McGown said. But if the government addressed the portion of earthquake risk which cannot be absorbed by the private sector, that would enable insurers to innovate in the earthquake insurance market “making the availability and affordability of earthquake insurance sustainable over the long term.”