Where the feds stand with an earthquake backstop

Canada’s federal government is aware of the need for a government financial backstop for earthquake losses, but the question is, will an earthquake happen before then?

Panellists at Canadian Underwriter’s 2024 Economic Outlook webinar Nov. 27 were asked if there was any status update on the federal government’s work on an earthquake backstop.

The questioner noted the Canadian private property and casualty insurance could see multiple insolvencies after an insured quake loss of more than $30 billion to $35 billion. The entire private insurance pool of capital for all insurance risks in Canada, home, auto and business, was in the neighbourhood of $50 billion four years ago.

“The last [federal] budget signalled clearly that Ottawa understands this is an issue,” said webinar panellist Alister Campbell, president of the Property and Casualty Insurance Compensation Corporation. PACICC is an industry non-profit corporation that compensates Canadian policyholders for an insolvent insurer’s outstanding claims.

“There’s a team working on solutions, but they are working on it among other files,” Campbell observed. “For a decade, we have been shouting this from the rooftops. We still don’t have what every other civilized nation on Earth with quake exposure does have, which is some form of contingency plan in a drawer. But I do believe we’ve made good progress in the discussions with Ottawa.”

Ottawa’s 2023 federal budget earmarked $31.7 million for a government flood backstop and hinted a quake backstop could follow the same model. “In parallel, the Department of Finance and Public Safety Canada will engage with industry on solutions to earthquake insurance and other evolving climate-related insurance market challenges,” the budget said.

Webinar panellist Jordan Brennan, chief economist and vice president of policy development for Insurance Bureau of Canada, has been engaged in the discussions with Ottawa about the need for a quake backstop.

“Finance Canada’s aware of it,” said Brennan. “They’ve built a team of a dozen people that have been working full-time on this over the last three or four years. But again, as Alister said, they’ve got many, many other priorities. And with low-probability, high-consequence events, it’s always easier to kick the can down the road…

“I’ll end on a positive note, I think, even though it is a forecast. Canada will have an backstop in earthquake. We will have a catastrophic policy architecture. The only question is, do we have it before the event or after? Because all the countries that have one now — Japan, New Zealand, go around the world — they all have those programs. They built them after a catastrophic earthquake. We should learn from their errors and put that infrastructure in place beforehand.”

Brennan said B.C. could see a total economic loss of up to $120 billion as a result of an earthquake in the Vancouver mainland/Vancouver Island area. A source from Aon Canada told a Catastrophe Indices and Quantification (CatIQ) conference earlier this year that between 43% and 48% of B.C. homeowners opt to purchase quake coverage. That suggests the P&C insurance industry could potentially take a $57-billion hit from such an event.

Take-up rates for insurance policies covering earthquakes are much lower in eastern Ontario and Quebec, with an Aon rep telling the CatIQ conference that only 3% to 4% of the region’s policyholders buy quake insurance.

Industry estimates in 2019 suggested a 5% to 15% likelihood of a Magnitude-7 earthquake in Quebec sometime over the next 50 years. IBC has commissioned a report from the Conference Board of Canada, expected to be published next year, projecting an earthquake in this region could cause more than $100 billion in losses.

That would be a huge bill for either the federal government or the P&C industry to bear, which ignited discussions about a public-private partnership to create a backstop model.

Feature image courtesy of iStock.com/MicroStockHub