A report by a non-profit research institute believes that once a major earthquake strikes Canada, the country could face a systemic financial problem unless the government takes steps to avert the issue.
According to C.D. Howe Institute, the author of the report, “severe quakes would affect all economic players, in particular those who fund or insure commercial, municipal or residential housing infrastructure.” The paper also pointed out that the P&C industry has warned that a sufficiently calamitous earthquake could devastate its ability to meet claims, leaving insurers unable to fulfil obligations to policyholders and further exacerbating the quake’s economic aftershocks.
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While Canada, in theory, is financially prepared for an earthquake, there are gaps in the government’s proposed risk management approach. The paper identified the following issues that need to be addressed:
- Gaps in Insurance Coverage
The paper noted that while a good portion of commercial, industrial, and personal policyholders along the Canadian West Coast have coverage for earthquake damage, only 2% of other Canadians have the same coverage.
- Dearth of Information on Pricing and Affordability
The report found that, in terms of insurance cost, there is no public Canadian data displaying trends in pricing or coverage. The lack of information is an obstacle for policymakers, the research paper’s authors said.
- Industry Financial Capacity is Capped
Currently, the industry has claims paying capacity for earthquake coverage that is higher than regulatory requirements. During events with losses materially above this level, many insurers would fail and the industry as a whole would be unable to meet claims.
- Crisis Resolution System Needs More Flexibility to Help Dampen Shocks
The Property and Casualty Insurance Compensation (PACICC) was created to serve as a backup in the event insurers fail to deliver. However, the PACICC is a private-sector organization not empowered to resolve financial difficulties before failure and does not receive any federal government financial support or guarantee; it is also post-funded instead of pre-funded. Essentially, it only intervenes when insurers have failed.
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The paper then recommended that the government should strengthen the PACICC so it can intervene before insurers become insolvent, ensure that the PACICC has the capacity to borrow to reduce its liquidity needs in a pinch, and let the organization rerun its scenario models to assess how much it could adjust to adapt to extreme events. The report also called for both the federal and provincial governments, as well as insurance industry bodies, to help homeowners better understand catastrophe risks.
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