Fault Lines: Earthquakes, insurance, and systemic financial risk

This publication urges policymakers to take several steps now to avert the risk earthquakes pose to the insurance industry in Canada. In fact, the fault lines from a major earthquake could quickly spread through the insurance industry and have a systemic financial impact. The steps taken for the prevention of another financial crisis as in 2007/08 has been to build resiliency and shock absorbers to minimise the impact of financial shocks on the real economy. Similar remedial efforts are required for earthquake risk.

The recommendations proposed in this document are the following (p. 15-16):

• to strengthen the Property and Casualty Insurance Compensation Corporation (PACCIC) so it can intervene before insurance companies in financial difficulty become insolvent;
• to ensure PACCIC has the capability to borrow to reduce its liquidity needs in a crisis;
• to return PACCIC's scenario models to examine how much that could increase resilience to extreme events;
• to undertake awareness programs to enhance homeowners’ understanding of catastrophe risks;
• to develop the insurance industry's models for setting aside adequate capital and claims-paying capacity.

C.D. Howe Institute Commentary, No. 454, August 2016.