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Currently showing: Climate/natural disasters > Disaster risk

25 Sep 17 13:56

As I write this blog, news of a second earthquake striking Mexico and its devastating impact on a country that only a few weeks ago was battered by an extraordinarily strong shake has reached me. Fortunately, the Government of Mexico recently bought protection and may get some financial respite through the FONDEN 2017 bond.

Building a more resilient world and closing the protection gap is something my company and my colleagues work hard toward achieving each day. But it's also a mission that's very personal to me. 

When I was a young girl a devastating earthquake rocked Italy’s Irpinia region in 1980; it killed almost 3,000 people and left 300,000 homeless. My grandparents had to flee their home because it was deemed unsafe and, as you can imagine, it took the area a long time to recover and rebuild. My grandfather didn't live the ten years it took for the reconstruction to be completed; he never slept in his own bed again, something that saddened him deeply despite the tremendous love and support he received from all of his children. That memory helps fuel my commitment to protecting societies and helping them recover more quickly in the wake of disasters. For me, moving the needle on earthquake protection is personal and it's a topic that I believe requires the industry's attention.

Dealing with earthquakes can be trickier than other perils. We all know earthquakes can inflict heavy loss of life and damage to property and infrastructures, deeply disrupting communities. However, the peril is not easily predicted, can strike in seconds and is not in people's minds.

This is especially true in eastern Canada, where there is a general lack of awareness about earthquake risk and earthquake insurance. That needs to change. Our latest paper, Earthquake risk in eastern Canada: mind the shakes, helps shed much needed light on the topic and exposes the consequences the region faces if steps aren't taken now to increase resilience. 

How real and significant is earthquake risk in eastern Canada? In Quebec, the great majority of the population –70% – lives in regions that have experienced considerable earthquakes in the past. And the economic engines of Montreal, Ottawa and Quebec City are all located in some of the most earthquake-prone areas of the country. Despite this risk, only 3% of eastern households have earthquake insurance versus 65% of households in the earthquake exposed areas of British Columbia. And most eastern houses pre-date the latest building code guidelines, making them more vulnerable to damage.

Statistics about the potential economic consequences of a major quake are eye-opening. We predict that a magnitude 7.3 earthquake in the Charlevoix seismic zone near Quebec City could cause losses of CAD 10.6 billion to residential property alone. And a repeat of the magnitude 5.8 earthquake that hit Montreal in 1732 could equal CAD 45 billion in losses to residential property. The Montreal scenario is particularly frightening if one overlays the economic losses from disruption of fundamental services, government activities, commerce and industry, none of which is included in our CAD 45 billion estimates. Nor is the broader economic impact on the country reflected. Government, take note!

Factors influencing low earthquake insurance uptake

From experience around the world, we have learned that a society's resilience increases with higher insurance uptake; that's because the financial burden from the insured loss is principally shared amongst a number of local insurers, global reinsurers and capital market investors that specialize in cat covers (like the Mexican bond mentioned in the opening). To make eastern Canada more resilient toward earthquake damage, we must take steps to increase earthquake insurance uptake and spread the risk through well tested market mechanisms. To do so, we must first understand why it's low to begin with. 

Lack of awareness is often the main reason for low insurance take-up rate. This is compounded by a bias in individual perception of earthquake loss experience: in recent history, no one in Canada has witnessed or experienced a substantial earthquake loss. We all have pictures in our heads of flooded or fire damaged homes, so when making the decision of whether or not to purchase earthquake insurance, property owners tend to want to protect against the latter perils. This is a problem because earthquakes tend to create more widespread damage than other perils. But even if property owners are aware of earthquake risk, they may not realize their basic cover does not automatically include the peril of earthquake. In fact, there is broad evidence that most homeowners wrongfully assume that their current homeowner policy would cover earthquake damages. This misinformation is worrisome and it sets a false sense of protection. 

Perceived cover value is another reason why home owners opt not to purchase earthquake insurance. The premium for earthquake insurance can be considerable when compared to a standard fire policy (adding nearly CAD 200 a year in the Quebec region to the base fire cover for a 300'000 house) and it comes with a substantial deductible. Why lighten your wallet by CAD 200 a year for something you might not claim on? What people ought to appreciate is the earthquake cover responds to a remote but financially very threatening scenario. That CAD 200 a year will ensure you can get your life back on track much faster and it may literally save you from bankruptcy, as families scramble to find the funds needed to repair or rebuild a home in the wake of an earthquake. 

Finally, there may also be the expectation that government will step in and assist the rebuilding efforts. I have no doubt that the local, provincial and the federal government will do their fair share and more; but their first preoccupation is saving lives, offer immediate post-event shelter and supporting critical infrastructure. Any help beyond that is very uncertain; in fact, it is even spelled out in the provincial legislations that where insurance is available and affordable, the government is released of all
obligations but protecting lives. Some provincial governments are working on clarifying that message even further, as the recent flood events have tested the collective understanding and shed light on the false expectations of uninformed and neglectful citizens. In reality, the financial burden of rebuilding homes will likely rest with individuals and families, who might be displaced or even out of work depending on the earthquake’s location and impact on infrastructure and services. And that's whilst servicing all along what is likely to be a highly leveraged mortgage. In Canada banks may extend help to families in distress through government-facilitated liquidity programs but loans are not forgivable.

Moving forward

So what do we do? While the answer isn't so simple, furthering a dialog about earthquake risk and raising awareness of the peril is a good start. 

Insurance can go a long way in building resilience against earthquake risk, and in many ways, we have never been as well prepared to tackle the issue. The industry is capable of new products and distribution to help make earthquake cover more affordable and appealing. But more needs to be done. 

To further this conversation and take steps toward action, on September 18th, we hosted a special event for our Quebec clients dedicated to earthquake risk in Eastern Canada. Steps away from the imposing Parliament building in the heart of the vieux-Quebec, we reviewed some of our report's findings, and opened the conversation to a panel discussion with industry leaders to examine the role our industry has to play in increasing our resilience to this peril, and how we could get there. Their strong connection to the local territory and a desire to see a more resilient region added sincerity and depth to the conversation. 

Collectively we must continue to push forward with communal resilience. We won't achieve true resilience until individual citizens, private sector and stakeholders from local and national governments uphold each pillar and share a common action plan. That came loud and clear from all our panelists. I truly believe earthquake preparedness in all its forms is a shared responsibility – and it is the ultimate test for the leadership of any country. Proactive earthquake mitigation is truly a multi-year journey, one that may take decades to accomplish but nonetheless one many generations of Canadians will thank us for.

Category: Climate/natural disasters: Disaster risk, Earthquakes, Resilience

1 Comment

Alicia Montoya - 3 Oct 2017, 10 p.m.

Thanks, Veronica. Powerful message and noble quest!

I find the psychology of buying insurance fascinating and often wonder about what the real obstacles are. According to this study I just read (albeit about flood insurance purchasing habits), it has more to do with how our brains work before and after an event and much less to do with other areas our industry is focused on right now (like online services).

"We find that, after controlling for calendar time trends and location fixed effects, the take-up of insurance is completely flat in the years before a flood, spikes immediately following a flood, and then steadily declines back to baseline. Robustness checks of the model show that changing insurance prices, changing homeowner income, potential serial correlation in floods, and different flood costs are unlikely to explain the observed pattern in insurance take-up." (read the full paper at )

We are, it seems, one stubborn species with a very short-lived memory of catastrophes. Which means if we really want to tackle the so-called protection gap, we're going to have to get much smarter about behavioral psychology.

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