Why quake backstop optimism is growing

Canadian property and casualty insurers are encouraged by federal government engagement on the earthquake file.

“In my career, in the time that we’ve been working on this, we’ve never been so close to an actual, meaningful solution,” says Andy Taylor, executive vice president and P&C leader for Beneva’s Ontario and West regions. “I think we’ll have something in the near future…

“Good is better than perfect, also,” he adds. “Let’s get something while we can, because if we miss this opportunity, I’m not sure we’ll have another chance for a period of time.”

Taylor made his comments alongside other leaders at the executive insurer panel at Insurance Brokers Association of B.C.’s AGM and Leaders Conference in Kelowna last week.

Susan Penwarden, managing director of personal lines at Aviva Canada, says it’s early days, but she’s seeing encouraging signs. “For some of us who’ve been advocating for a long time, this feels like real engagement, not just some discussion.

“We have a window of opportunity where, actually, the federal government is understanding some of this…in terms of the scenarios and the impact on the industry…and the fact that an event over here [B.C.] could impact the entire country and availability of insurance ultimately.”

IBC’s proposal

Last month, Insurance Bureau of Canada (IBC) proposed a private-public earthquake backstop called the Canadian Earthquake Risk Protection Act (CERPA), modelled after the U.S. Terrorism Risk Insurance Act (TRIA).

IBC says CERPA, like TRIA, “is designed to operate on a long-term, cost-neutral basis with no upfront public expenditure, while reinforcing insurer responsibility and preserving appropriate market incentives.” Taxpayers would be reimbursed for the government’s costs over the long term “by requiring the industry to repay any federal support through a temporary post-event premium surcharge, ensuring no upfront cost to taxpayers or consumers at the outset.”

IBC says it’s 30% likely that Canada will see a Magnitude 8 or greater earthquake (“the Big One”) hit Vancouver within the next 50 years. The association also cites a damage estimate suggesting a major earthquake in Canada could cause $52.6 billion in catastrophic damage.

According to a report released Monday by the Property and Casualty Insurance Compensation Corporation (PACICC), a “major catastrophic event” in B.C. of greater than $45 billion would “exceed the existing capacity of Canada’s P&C insurance industry and would also exceed PACICC’s ability to address the needs of policyholders. This is the point where a PACICC general assessment causes otherwise healthy insurers — even those not exposed to the initial catastrophe — to fail regulatory solvency tests.”

Penwarden notes “the Canadian industry is very well-capitalized, and we can handle most things with success. It’s that tail event that’s the issue that we need to deal with.

“And so, you need some kind of a public-private connection to help manage through whatever that tail event might look like. There’s dialog going on, and I think the positive news is that solutions are being considered, and discussion and debate is happening.”

Preventing systemic failure

It’s important to ensure there isn’t systemic failure of insurance companies in the event of a major earthquake, says Lambert Morvan, SVP, chief distribution and commercial lines officer at Wawanesa Insurance.

“[What] worries me even more than that is having an event of significant magnitude, but not large enough, and guess who’s actually going to end up with all the damage and pay for all the damage?” Morvan asks. “Most of them will be homeowners.

“Think about how large the deductibles are,” he says. “So, as a reputation or risk for the industry, that is massive.”

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For Morvan, Step 1 is putting a federal backstop in place. Step 2 is talking to regulators such as the Office of the Superintendent of Financial Institutions about things like deductibles and reinsurance.

“‘Why did our deductibles [go] up?’” Morvan asks. “Because reinsurance costs actually go up, because you’re actually asking insurance companies to buy up to a certain level of PML, which is fairly high,” he says. In this case, PML refers to Probable Maximum Loss, or the financial estimate of the highest physical loss reasonably expected from a single earthquake event.

“If you had that backstop in place, are you going to allow insurance companies to maybe not buy as much reinsurance, which could take that cost away, maybe decrease deductibles in some fashion to make the product more available and more affordable for people in British Columbia?” says Morvan. “I think that should be a logical next step.

“But at the same time, I think the first step is getting that backstop in place and see if there’s a way to also use that to make this earthquake coverage more available to people.”

Jason Contant

Jason has been an award-winning journalist with Canadian Underwriter for more than a decade, including the past three years as associate editor and, before that, as digital editor for seven years.