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In the absence of significant federal government intervention, major earthquakes that scientists regard as inevitable for Vancouver or Montreal will likely lead to the domino-like financial collapse of Canada’s entire insurance industry, warns a ����ɫ�� researcher.

“Canada is the only G7 nation that doesn’t have any type of federal involvement to help the insurance industry as a whole deal with mega catastrophes,” says Dr. Anne Kleffner, PhD, of the . “Without some type of intervention, such an event will result in serious economic consequences for Canadians.”

The problem was detailed in a co-authored by Kleffner that was published in the Geneva Papers on Risk and Insurance – Issues and Practice. It follows a in 2016 by the Conference Board of Canada, which estimated the country’s rate of economic growth would not only be halved in the short term, could also experience nearly $100 billion in cumulative losses in real Gross Domestic Product (GDP) in the long term.

The insurance industry has been “trying on and off for probably at least two decades to get the federal government to come to the table on this,” says Kleffner, who is a professor of risk management and insurance at Haskayne. “It isn’t perceived to be an urgent risk because there hasn’t been a recent major earthquake to remind people, and most elected governments don’t have a long planning horizon.”

Billions of dollars in losses

Based on research into the , scientists estimate there is about a one in 10 chance of a affecting B.C. in the next 50 years. An Insurance Bureau of Canada report estimated in 2013 that a magnitude 9.0 event 300 kilometres offshore from downtown Vancouver would cause $25 billion in insured losses and $75 billion in economic losses.

But onshore crustal earthquakes of about 7.0 in southwestern B.C. are seen as posing an even bigger threat due to their increased proximity, with an estimated of such an event happening in the next 50 years. A 6.9 earthquake that occurred in a similar geological setting in 1995 near Kobe, Japan, caused more than $200 billion in damage.

Although many Canadians are likely aware that B.C. is prone to earthquakes, it may surprise them to know that a region containing Montreal has an estimated in the next 50 years of being hit by an earthquake as large as the one that devastated Haiti in 2010. A magnitude 7.5 earthquake near Montreal would potentially result in insurance damage claims greater than $100 billion, said a by the Property and Casualty Insurance Compensation Corp. (PACICC).

Without government intervention, Kleffner says Canada’s insurance industry would likely collapse due to the relatively small size of the Canadian insurance market, a vulnerability that would be amplified by an assessment from the PACICC once some insurers failed.

‘Contagion' effect predicted 

As a non-profit corporation paid for by Canadian property and casualty insurers, PACICC operates a guaranty fund to protect policyholders from undue financial losses if their insurer becomes insolvent or bankrupt. Following such an event, PACICC issues an assessment of how much each surviving company must pay into the fund to cover such policyholders.

However, if total insured losses of policyholders reach more than $35 billion due to an earthquake, Kleffner’s study estimates as many as 18 insurers would likely go bankrupt, with another seven insurers collapsing due to the failure of group members.

Due to the resulting “contagion” effect caused by the huge size of the PACICC assessment on the surviving companies, the study says several large insurers would also go under. “Once a large national insurer fails, what’s left of the industry won’t be able to cover the assessment,” says Kleffner. “The entire Canadian property/casualty insurance market would collapse.”

Not only would this likely delay reconstruction after a major earthquake, but the financial consequences of the collapse would also ripple throughout Canada’s economy, she says. The federal government can best avoid this by creating a public/private partnership with the insurance industry to create a national disaster risk financing plan, she says.

Solvency backstop part of plan 

It could provide reinsurance, or insurance for insurers, similar to Japan’s earthquake program, says Kleffner. Such a program helps by providing financial liquidity to insurers to pay policyholders in a timely fashion, as well as acting as a “solvency backstop” to limit bankruptcies — and would only kick in after low frequency, high severity events such as major earthquakes, she says.

“In the absence of such a plan, the federal government will likely be forced to intervene following a mega catastrophe in order to prevent the collapse of the insurance industry, but having something already in place will help reduce the degree of disruption in the industry, and hence the economy,” she says.

Besides Kleffner, the study was co-authored by , a Chair in Insurance at Wilfrid Laurier University; and , chief economist and vice-president, financial analysis and regulatory affairs, at PACICC.