Canada’s $127-Billion-Dollar Disaster

Written by Joanne Kennell, CatIQ

Let’s set the scene: It’s a typical Thursday morning. The city of Vancouver is buzzing with morning commuters. People are lined up at their favourite coffee shop to get their morning caffeine fix, parents are dropping their children off at school, and on-route employees are busily weaving up and down sidewalks on their way to the daily grind. Then it strikes – a magnitude 9.0 earthquake ruptures 75 km from the city. The violently shaking earth crumbles buildings as if they are made of sand. It also cracks and breaks roads making them impassable, and knocks out power across the entire city. People are injured, and homes have been destroyed.

The societal impacts of such an event would be devastating, and the economic impact would be cataclysmic.

(United States Air Force/Wikimedia (Public Domain))

Catastrophic insured losses due to natural disasters, such as flooding, hail, wildfire, etc., have continued to increase in Canada over the past few years.  However, according to a study conducted by The Conference Board of Canada (McIntyre and Desormeaux, 2016), a large earthquake is likely the only event that could bring the industry down. And although such a dramatic event seems impossible here in Canada, according to Natural Resources Canada, there is a 30% chance a major earthquake will strike BC’s West Coast in the next 50 years – a statistic not to be sneezed at!

In order to determine the impact of a major B.C. earthquake, the IBC funded-study stress-tested for an earthquake that could result in more than $30-billion in insured losses – above the amount that the property and causality insurance industry could currently handle. This size of loss equates to a seismic event of magnitude 9 that occurs close to Vancouver. Following an earthquake of this magnitude, insurer failures would likely happen, and because insurance companies are required to back each other’s claims, this practice will collapse if the industry is overwhelmed by claims (Nelson, 2016).

The costs of a major earthquake off the coast of B.C. would not only impact the West Coast but “put the national economy in jeopardy” explains the report. The report considered the cost of destroyed property, deaths, lost jobs, and the struggles involved with rebuilding. Over a 10-year period, the total economic costs would be a mind-boggling $127.5-billion! Compare that to Canada’s costliest insured-loss catastrophe, the Fort McMurray wildfire, which cost nearly $3.6-billion (CatIQ).

The cost breakdown of a major B.C. magnitude 9 earthquake over the 10-year period is as follows:

·         $42-billion – the amount of losses that would be covered by property and causality   insurers

·         $96-billion – if the insurance industry failed as a result of the earthquake, this    
  would be the total loss in gross domestic product, adjusted for inflation

·         $133-billion – consumer spending would decrease by this much as people struggle
  to rebuild their lives

·         43,700 – the number of jobs lost

It is important to note that an earthquake generating losses above the insurance industry’s capacity would be extremely rare. In fact, according to the federal Office of the Superintendent for Financial Institutions, by 2022 there will be sufficient claims-paying capacity for a 1-in-500-year earthquake. However, as realized with Japan in 2011 and New Zealand just a few weeks ago, there is always the possibility that a larger than predicted earthquake could strike. This is why a report focusing on a worse-case scenario is important – it highlights gaps and areas in need of improvement within the Canadian insurance system. It also acts as a reminder that governments need to invest more in earthquake preparedness.

In Canada, there are roughly 4,000 recorded earthquakes each year. However, earthquake damage is not covered by a standard home insurance policy – it can be added on to an existing policy (IBC, 2016). Earthquake insurance covers contents caused by the shaking of the earth. If the shaking of the earth results in a fire (caused by a broken gas main, for example), only the loss or damage from the fire would be covered under a regular insurance policy.

According to IBC, approximately two-thirds of B.C. homeowners have earthquake insurance. However, B.C. is not Canada’s only major fault zone. There is one that lies on the Quebec City – Montreal – Ottawa corridor, and there is a 5-15% chance of a major earthquake impacting this area in the next 50 years. However, only 2% of residents in this zone have earthquake insurance (CBC News, 2016).

David Edington, who studies the rebuilding processes after the major earthquakes in Japan and New Zealand, explained to Metro News Vancouver (Li, 2016) that “[i]t’s a social problem for how you prepare for a low frequency but very high impact disaster.” Especially since B.C. does not experience earthquakes often, and even less occur in the Ontario/Quebec zone.

Pedro Antunes, deputy chief economist at The Conference Board of Canada hopes the results will serve as a wake-up call for policymakers. As the report explains, building codes need to be upgraded, and seismic regulations would save lives. People also need to be more aware of earthquake risks and should be encouraged to consider earthquake insurance coverage, especially in the Quebec City – Montreal – Ottawa corridor (CBC News, 2016).

References

CBC News. 2016. "Major quake could pose systemic risk to Canada’s financial sector, report says". CBC News Business. URL: http://www.cbc.ca/news/business/earthquake-insurance-report-1.3705332

Insurance Bureau of Canada. 2016. "Earthquake Insurance". URL: http://www.ibc.ca/on/home/types-of-coverage/optional-coverage/earthquake-insurance/

Li, Wanyee. 2016. "Major B.C. earthquake could cost Canadian economy $127.5 billion: report". Metro News Vancouver. URL: http://www.metronews.ca/news/vancouver/2016/11/23/bc-earthquake-to-cost-canada-economy-says-conference-board.html

McIntyre, Jane and Marc Desormeaux. 2016. "Canada’s Earthquake Risk: Macroeconomic Impacts and Systemic Financial Risk". The Conference Board of Canada.

Nelson, Jacqueline. 2016. "Major B.C. earthquake could put ‘national economy in jeopardy’". The Globe and Mail. URL: http://www.theglobeandmail.com/report-on-business/major-bc-earthquake-could-put-national-economy-in-jeopardy/article32969556/