British Columbia (BC), the westernmost province in Canada, has identified a need to develop a fast-response insurance solution to protect vital infrastructure in the event of an earthquake, and has already started working with reinsurers.
Southwestern municipalities in BC are reportedly looking at the establishment of an earthquake insurance product to protect infrastructure as the province faces a 1-in-3 chance of a major quake occurrence within the next 50 years, according to data from Natural Resource Canada outlined in an article in The Globe and Mail online.
Currently, should an earthquake disrupt water systems, damage roads and buildings and so on in the regions, aid is delivered by the Disaster Financial Assistance Arrangements (DFAA) program, but from as long as four years ago and still today, certain municipalities have voiced a concern that this might not be enough.
“If you can’t provide sewer and water to a neighbourhood, people can’t live there. If they can’t live there, they don’t want to pay their property taxes. And if they’re not paying property taxes, what are municipal governments going to do for money?” questioned Tom Barnes, Chief Executive Officer of the Municipal Insurance Association of British Columbia (MIABC), speaking to The Globe and Mail.
Analysis from the MIABC (which manages liability and also some property insurance for 170 local governments) in collaboration with reinsurance companies, reveals that roughly $97 billion of uninsured municipal infrastructure exists in the lower mainland of BC, including Vancouver.
In an effort to improve disaster resilience a number of municipalities have expressed the need for infrastructure insurance that covers against earthquakes and that importantly, enables municipalities to respond quickly to an event and get everything up and running as fast as possible.
The report reiterates a need for a solution that enables infrastructure to be “back online quickly” and the ability of municipalities to position them to “respond quickly in an emergency.”
While it isn’t mentioned in the report, to us at Artemis it seems a parametric insurance or risk transfer solution would be an ideal approach to such an issue, emphasised by the fact that it pays out rapidly post-event – based on a predetermined-sized quake occurring in a pre-defined area or zone.
This means that funds can be disbursed long before any actual damage is assessed, which can take a long time in certain situations, especially in the event of a substantial earthquake.
Much like Business Interruption insurance enables businesses to recover quickly after an event, the use of a parametric trigger structure within an infrastructure protection product could enable municipalities to begin reconstruction as soon as possible, ultimately mitigated the impacts of a large quake.
“The bottom line was, assuming all goes well and you get full payment promptly for all that stuff, this program will reimburse local governments for about 80 per cent of the damages. That’s the only thing in place right now,” said Barnes, discussing the current structure of the DFAA program and potential issues with the program.
The article notes that 22 municipalities in the province are mulling the idea of joining forces to solve the potential short fall in funding post-event, and has been working with reinsurers, including reinsurance giant Munich Re to establish such a solution.
According to Philipp Wassenberg, President and Chief Executive Officer (CEO) at Munich Re Canada, the reinsurer continues to work on an infrastructure loss insurance plan, that could be ready in as soon as two months.
In fact, were British Columbia to opt for a parametric arrangement and pooling of the risks, it could even make an earthquake catastrophe bond a viable solution to provide the quick paying insurance protection that the municipalities and cities require.
The capital markets would, of course, be delighted to get an opportunity to provide some of the capacity required for such an initiative, either directly providing insurance capacity, or reinsurance capacity through investments into a cat bond or other structure underpinning the risk pool.
The issue is with getting approval from enough municipalities, with five being touted as a requirement for the plan to be a success, as any less would result in the pool of funds being inadequate to address the issue.
Barnes continued to explain that should the insurance plan receive approval from the relevant number of municipalities then coverage could reach an estimated $200 million in protection against a large quake within the next five years.
With the potential exposure so vast and the real need for rapid and urgent response, a parametric structured solution could be a very suitable approach for such an infrastructure insurance plan.
As work with reinsurers is underway it will be interesting to see what progress is made in the coming months, and what the structure of the plan will look like and how it aims to protect the broad range of vulnerable municipalities and their infrastructure against a large quake.