Report says Canada's insurers one major quake away from disaster

With 40 per cent of Canadians living in areas with a moderate to high risk of an earthquake, a report by non-profit policy research organisation CD Howe Institute warns that Canada’s insurance industry would be a major casualty of a large, uninsurable natural disaster.

“Since the 2007-08 financial crisis, policymakers have paid much attention to the buildup of risk in the banking system,” said Nick Le Pan, senior fellow at the CD Howe Institute and the report’s author. “However, no equivalent discussion exists for the impacts of natural disasters to Canada’s economy.”

The insurance industry has adequate financial capacity to deal with an earthquake that has a one in 500 year chance of occurring and causes up to C$35 billion (US$27 billion) in damages, but a natural disaster that results in more serious damages would send shockwaves through the entire insurance industry.

Canadian insurance companies are all members of the Property and Casualty Insurance Compensation Corp. (PACICC). If an insurance firm doesn’t have enough cash in reserve to pay all its claimants, the PACICC makes the payments and passes the costs on to its member insurance firms.

According to Le Pan, that raises concerns for the overall industry’s stability because it could create a domino effect that could drain cash reserves industry-wide.

Le Pan was an insurance industry regulator when earthquake regulations were implemented.

“Nick Le Pan is the right guy to be commenting on the state of regulations,” said Craig Stewart, vice-president of federal affairs for the Insurance Bureau of Canada (IBC), “and I believe our industry believed that the CD Howe report was quite thoughtful and presented some pretty sound solutions that we’re looking into.”