The fault lines from a major earthquake in Canada could quickly spread through the insurance industry and have a systemic financial impact. Policymakers should take several steps now to avert this chain of events.
This commentary highlights the need for the federal government to address gaps in the existing Canadian insurance scheme to ensure that a severe tail-risk earthquake does not become a systemic financial problem.
It also concludes that there is a strong case for establishing a federal government/industry backstop arrangement that could be activated to deal with such an uninsurable catastrophic risk.
To further reduce systemic financial impacts of severe catastrophes, the study also recommends the following reforms to PACICC:
- Strengthen PACCIC so it can intervene before insurance companies in financial difficulty become insolvent.
- Ensure PACCIC has the capability to borrow to reduce its liquidity needs in a crisis.
- Following these structural changes, PACCIC should rerun its scenario models to examine how much that could increase resilience to extreme events.
Furthermore, it recommends that insurance industry bodies, as well as federal and provincial governments, undertake awareness programs to enhance homeowners’ understanding of catastrophe risks. This should encourage Canadians to evaluate the merits of disaster insurance coverage, particularly in the Quebec City-Montreal-Ottawa corridor where such insurance penetration is far too low.
"C.D. Howe Institute - Fault Lines: Earthquakes, Insurance, and Systemic Financial Risk" (PDF)