Canadian government needs to measure exposure to quakes; cat bonds discussed

by Artemis on April 8, 2011

The recent earthquakes in New Zealand and Japan have stimulated discussion of the financial exposure to earthquakes in other countries around the world. Canada, not a country you generally associate as at major risk of quake damage, is beginning to see calls for their quake exposure to be measured accurately so that risk management and risk transfer preparations can be made.

A recent research paper from the Toronto based Institute for Catastrophic Loss Reduction says that there is as much as a 30% chance that a significant earthquake, enough to cause major damage, could hit southwestern British Columbia within the next 50 years. That area of Canada includes the cities of Vancouver and Victoria, meaning that the financial exposure could be large. There is also a 15% chance that a significant quake could hit southern Quebec or Ontario including areas such as Montreal, Ottawa and Quebec City.

This article in the Vancouver Sun says that the first step Canada’s government needs to achieve is putting a potential financial cost to various earthquake scenarios. Only be knowing the potential size of economic losses from a major quake could the government then put risk management, risk transfer and reinsurance of reasonable levels in place.

Once the potential exposure is known, the article suggests, the government could then decide whether issuance of catastrophe bonds would be a suitable form of risk transfer for Canada. Transferring some of the governments earthquake risks to capital market investors could be an effective way of mitigating the economic fallout of an earthquake, particularly negating the need for hefty tax rises to help the government rebuild infrastructure after a disaster (as we saw in New Zealand).

This is another example of the heightened profile of cat bonds in the wake of recent disasters. It seems likely that some governments will begin to investigate the use of insurance-linked securities more closely and our sources in the market confirm that early enquiries have been received from interested parties.

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