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