‘Insurers one major quake away from disaster’

CD Howe Institute, a non-profit policy research organisation, has warned in a recent report that the insurance industry would be a major casualty of a large, uninsurable natural disaster.

Around 40 percent of Canadians currently live in areas with a moderate to high risk of an earthquake, according to the South China Morning Post.

“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 CAD35 billion (USD27 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. The 2011 Japanese earthquake and tsunami is an example of the mega-natural disaster used in Le Pan’s report.