P&C insurers beware: Earthquake exposure may be higher than you think

Thanks to the possibility of earthquake aftershocks in B.C., and a 60% commercial insurance penetration in Quebec, Canada’s property and casualty insurance industry may have a bigger quake exposure than it thinks.

Tiegan Hobbs, a research scientist at Natural Resources Canada, ran some sobering quake modelling estimates past delegates attending CatIQ Connect in Toronto Tuesday.

Hobbs’ presentation suggests insured damage estimates for quakes in Vancouver and Montreal are much higher than some of the industry’s damage estimates suggest. And in both scenarios, they far exceed the $35-billion mark that the industry has identified as the “tipping point” for the potential of multiple insurance company insolvencies.

Hobbs noted quake exposure risk is frequently underplayed in Quebec because the take-up rates of earthquake home insurance are as low as 2%. However, penetration rates for commercial property quake insurance are around 60%, meaning the industry will still be on risk for tens of billions of dollars if a major earthquake were to rip through Montreal.

She referenced the Charlevoix Seismic Zone, located about 100 km downstream from Quebec City. NRC’s website shows it’s the most seismically active quake zone in eastern Canada, with five quakes registering at a Magnitude 6.0 or higher since 1663.

Eyewitness accounts published on the NRC website report 300 homes were damaged by a Magnitude 5.8 quake in 1732. One hundred and eighty-five homes were destroyed by fire following the earthquake and one person died.    

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Hobbs said NRC modelled what would happen if that same 1732 earthquake happened today.

“Right under the old port in Montreal, we see a total direct shaking loss of $56 billion,” Hobbs said. “With the insurance features, we go up to $92 billion. Of this, $48 billion will be paid by insurers.

“And so this one’s kind of interesting, because even though the penetration rate, especially for residential insurance in Eastern Canada, is quite low, in my model, at least, we’re actually seeing quite a high fraction of the loss being paid out by insurers.

“Because this model shows much of the loss is coming from commercial properties, and so having 60% commercial penetration still leads to a big impact for the insurance sector.”

Meanwhile, on the West Coast, insurers have typically modelled what would happen if ‘The Big One’ were to hit Vancouver. As of last June, industry experts said NRC had presented a new model that gave insurers reason to pause on the true devastating impact of a major quake.

That new model presupposes a Magnitude 7 aftershock following a Magnitude 9 earthquake.

Canada’s Property and Casualty Insurance Compensation Corporation (PACICC), a compensation fund that pays out claims when insurers become insolvent, has previously published a report suggesting that, if an earthquake were to cause more than $35 billion in damage, there is a risk of multiple insurers failing.

Hobbs said NRC has modelled a Magnitude 9 quake in the Greater Vancouver Area.

“Our national model shows that we should have about a $38-billion loss from this Magnitude 9 event, only talking about damage to buildings from the main shock shaking.”

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More than 60% of the loss in this model would be paid by policyholders through their earthquake deductibles, she said.

But then, “if we now add a Magnitude 7 aftershock, because we really want to, apparently, kick over every block in Western Canada,” Hobbs said, “now we end up with a total direct shaking loss of $84 billion.

“When we start adding in those insurance [coverage] features, the total loss goes up to $130 billion; and, of this, about $53 billion would be paid for by insurers. So we’re definitely now over the PACICC limit.

“And when we look at the breakdown…we’re still seeing over 50% of that total loss coming from people who have paid their policy every month or year and are still having to pay out deductibles.”

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.