How Canada Can Limit Financial Disruption From A Major Earthquake

Bookmark and Share

Toronto, ON (Sept. 6, 2016) – Canada faces a serious risk to its financial stability should a severe earthquake occur in an urban area. Fortunately, there are effective measures that policymakers can take in advance to mitigate the potential of an earthquake to damage our financial system. This is the conclusion of a new study just released by the C.D. Howe Institute, titled Fault Lines: Earthquakes, Insurance, and Systemic Financial Risk, authored by a former head of Canada’s Office of the Superintendent of Financial Institutions, Nicholas Le Pan.

The risk of large financial losses caused by an earthquake in Canada is greatest in the Lower Mainland area of British Columbia, and in the Quebec City-Montreal-Ottawa corridor. But it is not a matter of “if” this risk will occur; it is a matter of “when.”

According to Mr. Le Pan, averting the most serious and systemic earthquake-related risks to Canada’s financial stability will require some form of government involvement. He notes that “a federal emergency backstop arrangement for property and casualty insurers, properly designed, would minimize the systemic financial impact resulting from such a catastrophic and likely uninsurable event on those affected and on the economy at large.” He views such an arrangement as being similar to the federal backstop that exists for Canada’s banking industry. Mr. Le Pan proposes that the backstop arrangement would only kick in if the severity of an earthquake threatened to overwhelm the insurance industry’s own policyholder compensation scheme – which is operated by the Property and Casualty Insurance Compensation Corporation (PACICC).

As PACICC’s President and CEO Paul Kovacs puts it, “Canada’s P&C insurance companies are well-capitalized and can pay most of claims that would result from insured earthquake losses – likely as much as $30 billion. Beyond this threshold, however, the risk of financial contagion rises sharply because the financial health and stability of surviving insurance companies becomes threatened by the need to fund the compensation paid to the policyholders of insolvent insurers. PACICC welcomes the findings of the new study completed by Nick Le Pan for the C.D. Howe Institute, and we urge the Minister of Finance to look carefully at his policy recommendations.”

PACICC is Canada’s industry-run financial guarantee fund for property and casualty insurers. Established in 1989, PACICC has successfully managed the winding-up of more than a dozen insolvent member insurance companies, paying the eligible claims of thousands of policyholders in the process.

For more information, contact:

  • Paul Kovacs, President & CEO, PACICC, (416) 364-8677 ext. 3213

About the C.D. Howe Institute

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. For more information, visit www.cdhowe.org/about-us.