A recent report is sounding the alarm bells on the Canadian insurance industry’s lack of preparedness for a mega-catastrophe, such as a major earthquake.
Co-authored by two university professors and a chief economist, the paper was published in The Geneva Paper on Risk and Insurance — Issues and Practice in August and focuses on the insurance industry’s vulnerability to major natural disasters.
“Canada is the only G7 nation that doesn’t have any type of federal involvement to help the insurance industry as a whole deal with mega catastrophes,” Anne Kleffner, a professor at the University of Calgary’s Haskayne School of Business and co-author of the report, told the Financial Post.
“Without some type of intervention, such an event will result in serious economic consequences for Canadians.”
According to the Post, those consequences would be felt after the fallout of the country’s small regional property and casualty insurers, all of which would fail, the report says, if a mega-catastrophe resulted in total insured losses of more than $35 billion.
Insurance payouts would then fall to larger insurers required under the Property and Casualty Insurance Compensation Corporation, a compensation body funded by the insurance industry. This would then cause “a contagion effect,” the report says, where “several insurers fail because of the assessment, and the end result is the collapse of the entire industry.”
Kleffner told the Post that the impact of a major disaster would be felt well beyond just the insurance industry, too, affecting sectors such as transportation and manufacturing that require insurance to operate.
That’s why the authors are calling on the federal government to intervene and limit future risks to the industry. Kleffner told the Post that there have been “lots of conversations” around this for the last couple years, but “no action.”
The Department of Finance’s manager of media relations and consultation told the Post in an email that “This work is underway” at the federal level, and that Canada’s banking and insurance regulator, the Office of the Superintendent of Financial Institutions (OSFI) requires insurers to have enough “resources to withstand a 1-in-500-year earthquake.”
But Kleffner believes it would be more useful to have a financial arrangement in place now at the federal level — rather than the government have to bail out the insurance industry at the final hour.
“It isn’t perceived to be an urgent risk because there hasn’t been a recent major earthquake to remind people,” she told the Post. “And most elected governments don’t have a long planning horizon.”