A major earthquake could pose a serious risk to Canada's economy, says a new report from the C.D. Howe Institute that calls for action to bolster the financial system so it could better handle the aftermath of such a disaster.

Canada's property and casualty insurers could handle claims totalling up to $30 billion, says the report's author, Nick Le Pan. Beyond that, "the catastrophic losses would exceed the existing capacity of Canada's insurance industry," Le Pan says. 

One or more national insurers would fail, he says. Even with lower insured losses — in the $25 billion to $30 billion range — several smaller companies would fail. 

Le Pan, a former federal superintendent of financial institutions, urges banks and credit unions to carry out stress tests to account for the fallout to insurers from natural disasters, pointing out that mortgage insurance does not cover earthquake losses and many mortgages lack quake coverage.  

30% chance

By some estimates, there is a 30 per cent chance that British Columbia could be hit with a significant quake in the next 50 years. A magnitude 9.0 quake off the coast of Vancouver could lead to $75 billion in losses, with about $20 billion of that insured, according to industry figures.

But one analysis suggested that a catastrophic West Coast quake could lead to insurance claims of up to $95 billion — far above the ability of the industry and its compensation organization to cover.

Almost two-thirds of southwest B.C. homeowners have earthquake insurance, the report notes, while coverage by renters is much more sporadic.

But B.C. is not Canada's only quake zone.

In the Quebec-Ottawa-Montreal corridor, for instance, Natural Resources Canada estimates a 10 to 15 per cent chance of a major earthquake. A magnitude 7.1 quake in the St. Lawrence Valley between Montreal and Quebec City could lead to $60 billion in damage, with insured losses of $12 billion. Only two per cent of homeowners in this area have earthquake insurance.    

Currently, there is no federal emergency backstop arrangement for property and casualty insurance companies that would be triggered beyond a certain loss level. Such guarantees already exist in the banking industry, for instance.

Risk awareness

The industry-funded Property and Casualty Insurance Compensation Corporation (PACICC), which covers claims when an insolvent member company can't make payments to policyholders, should be strengthened, the report argues.

"PACICC has effectively handled individual company failures in the past, but would need to enhance its emergency response capacity for such a catastrophe, as it has never dealt with multiple members in financial difficulty at the same time," it says.   

The report also says governments and the industry need to make people more aware of earthquake risks and encourage them to consider disaster insurance coverage, especially in the Quebec City-Montreal-Ottawa corridor where it says coverage is far too low.

"Having appropriate prevention, insurance and coping mechanisms in place in advance reduces the short-term macroeconomic impact of disasters and increases the chance that growth potential is not permanently impaired," the report says.