Warning: Lack of Earthquake Readiness Could Leave Canada Counting ‘Significant’ Cost

A new study from insurance experts using extensive modelling reveals that Canada will suffer significant economic and insured costs if it does not prepare for a major earthquake.

Commissioned by the Insurance Bureau of Canada (IBC) to analyze the impact of two major seismic events, the report was produced by AIR Worldwide. It forecast extensive losses if modelled scenarios involving a 9.0-magnitude earthquake off the west coast of Vancouver Island and a 7.1-magnitude quake about 100 km northeast of Québec City came to be.

This, the report concluded, demonstrated the need for a national strategy on earthquake response.

AIR, a catastrophe modelling firm, developed the western and eastern scenarios and estimated total economic loss and insured loss for both. The two selected regions are at particular risk as a result of their large population density and elevated level of seismic activity, AIR’s experts warned: "Although these two seismic source zones cover only a small fraction of Canada by area, they impact about 40% of the national population."

For the western scenario, economic losses would be $74.7 bn* and insured losses $20.4 bn; for the eastern scenario, those losses would be $60.6 bn and $12.2 bn, respectively.

The breakdown for insured losses in both scenarios by peril are as follows:
With regard to expected economic losses, for the western scenario, the perils of shake, tsunami, fire following event, and liquefaction and landslide would produce direct loss of $58.6 bn for property, $1.9 bn for infrastructure, and $1.5 bn for public assets. The total direct loss would be $62 bn, while indirect loss is pegged at $12.7 bn.

For the eastern scenario, the perils of shake, fire following event, and liquefaction and landslide would produce direct loss of $45.9 bn for property, $2.0 bn for infrastructure and $1.4 bn for public assets. The total direct loss would be $49.3 bn, while indirect losses are pegged at $11.3 bn.

AIR says the study is a hypothetical exercise rather than a prediction of future events. That said, the impact of the events and their projected loss costs can be seen as good indicators for the likely outcome of similar events, the company adds. Both scenarios are attributable to established seismic sources and similar to earthquakes known to have taken place in the past: "Earthquakes of the magnitude modelled are low-frequency events in these locations, considered to have a 0.2% probability of occurring in any one year, but sufficiently threatening and devastating to warrant prudent planning and preparation now."

The IBC said the findings of the peer-reviewed analysis left "no doubt that Canada is not prepared to handle a major earthquake, which could happen at any time, and that the economic impact would be significant."

Its president and CEO, Don Forgeron, said: "The risk of a major earthquake affects us all, not just those living in high-risk areas. Events of this magnitude have a domino effect on the Canadian economy triggered by property damage, supply chain interruption, loss of services, infrastructure failure, and business interruption."

He added: "Insurers, governments and all Canadians have a responsibility to prepare. If a mega-earthquake should strike in a densely populated area, insurance alone will not pay for all the damage."

However, Mr. Forgeron said, the study demonstrated that mitigation—such as more resilient buildings and infrastructure—"can further reduce economic losses by a third or more. That’s why we are calling for an integrated preparatory approach to the earthquake threat."

The IBC plans to do its part to advance a national conversation on how to prepare for a mega-earthquake, which is a greater than 1-in-500-year event and exceeds the industry’s capacity to respond. The bureau is committed to working closely with governments, the financial services industry, and non-government organizations to ensure a national response framework is in place before such an earthquake hits.

Mr. Forgeron added: "The study is a valuable tool and will be shared with governments, regulators, disaster preparedness organizations, the banking community, the insurance industry and the public."

Things have changed—as has understanding of the potential impact of a major earthquake—since Munich Re released the last study of the economic impact of an earthquake in Canada more than 20 years ago. Among these changes, the report points to urban and infrastructure development, economic and population growth, advances in earthquake research and building codes, and legislative changes. Its authors add: "Furthermore, recent experience has shown that risk such as tsunami, liquefaction and business interruption may not have been fully understood or taken into consideration when assessing earthquake risk in the past."

The report, Study of Impact and the Insurance and Economic Cost of a Major Earthquake in British Columbia and Ontario/Quebec, is available here.

*All figures given are approximate.

Canadian Institute of Actuaries/Institut canadien des actuaires