Opinion: Pandemic Reminder The Canadian insurance industry needs government support for catastrophic events

Evan Bootle pulls the plastic screen that was hanging in front of the theater at the Dakota Tavern in Toronto, on September 30, 2020. The bar, which is losing its security, will be closed.

Fred Loom / The Globe and Mail

Aleister Campbell is the President and CEO of the Property and Loss Compensation Company (PACICC).

The global pandemic, COVID-19, has tested the ability and capacities of governments around the world to respond to extraordinary healthcare challenges, while managing and mitigating the devastating economic impacts of lockdown measures. In retrospect, governments of all spectrums and around the world will be forced to think about how to better prepare for such a low-likelihood and impact scenario – known in the insurance industry as “tail risk”. Whatever good comes from this terrible global event, we hope that governments and societies recognize the benefits of building better contingency plans. The COVID-19 pandemic strongly demonstrates the core benefits of an “in-case – emergency glass breaking plan” of such high-risk events.

Insurance leaders in Britain and the United States recently published proposals to create public / private epidemic pools, or other quota-sharing arrangements, designed to help mitigate the next challenges of the current pandemic and respond better to any future pandemic. In Britain, it is modeled, at least in part, along the lines of work already done there with reinsurers Pool Re and Flood Re, which is put in place to handle risky events such as terrorist attacks, nuclear accidents or floods. In the United States, a starting point was the lessons learned from the Terrorism Risk Insurance Act – built in response to the horrific terrorist attacks of September 11th.

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However, in Canada, with the exception of the decades-old Canadian Nuclear Insurance Association (which is a public / private insurance group to cover nuclear-related events), we have neglected to expand our risk transfer mechanisms to address apparent tail risks. The face as a state.

Certainly, our federal government needs to identify and implement the best solutions to tackle the pandemic. Recent media coverage of insurance challenges facing companies such as restaurants and bars, which are particularly exposed to liability risks related to COVID-19, is helping to amplify the relevance, urgency and complexity of this challenge.

At the same time, Canada should seize this opportunity to tackle some of the other long-standing, but so far unaddressed, events that involve tail risks that we also know are inevitable in our large and geographically diverse country: earthquakes, wildfires and floods. It is an alarming reality that Canada remains the largest developed economy in the world with a high exposure to earthquakes and without a government mechanism to support the insurance sector and properly protect the citizens of our country when this inevitable event occurs.

The biggest challenge to achieving this overall goal is the very different underlying insurance problems that these very different events represent. The basic principle of insurance is risk pooling. This is exactly why the pandemic is, in general, excluded from the insurance policies offered by our insurance companies in Canada and around the world. It is impossible to diversify the risks, either in time or by geographic region: a global pandemic afflicting everyone everywhere at the same time.

Therefore, if “epidemic pools” were established, the insurance industry could offer distribution and claims management capabilities but could not subtract tangible amounts of risk capital. Ultimately, the loss should be largely borne by the government. Over time, a modest tail risk premium can be collected and invested, and in a sufficiently long period of time without major events a large pool can be accumulated. But such agglomerations will never be sufficient to offset the economic losses caused by the shutdown of entire advanced economies for successive months.

The situation is different with earthquakes (or wildfires, or floods in low-risk areas, for that matter) completely. Insurance companies are ready to respond to mega-events without ever having to turn to the government because many individuals and companies actually buy insurance to cover these risks. Sure, there are issues with the product design. There is still much work to be done to increase policyholder acceptance for coverage in the Montreal-Ottawa earthquake-prone corridor. But, unlike an epidemic, earthquake risks are globally diversified (it is unlikely that the Earth will shake in multiple locations simultaneously or burn everywhere at once). Therefore, insurance companies can price, select and insure an earthquake as they would in the event of a flood or fire, and pay claims when it occurs.

Also, unlike a pandemic, we know that the insurance industry can withstand a massive earthquake event. The Financial Institutions Supervisor’s Office asks insurers to demonstrate their ability to survive a 1 in 500-year earthquake event in British Columbia or the Montreal / Ottawa Corridor, using their own capital and support for global reinsurers (yes – insurers buy insurance too). Our country can probably face such devastation without the failure of a single insurance company. Even in the event of such a failure, the Industry Compensation Fund (PACICC) can respond effectively to protect policyholders.

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But there is still a simple fact that for an earthquake event above a certain level of typical risk, the industry will experience a depletion of its capital and reinsurance capacity. Above that level, designing the PACICC stent would be problematic – charging the remaining insurers to fund failures would bankrupt the remainder in a chain reaction.

In 2016 PACICC formulated that after an earthquake that caused insured losses of more than $ 35 billion, Canadian industry would face a downturn. But the type of government support required is very different from a pandemic situation. In the event of a pandemic, the insurance sector can offer minimum levels of coverage (at best) before having to transfer the risks to the government. In contrast, in the event of an earthquake, all that Canada needs is government support for really severe tail risks – money the insurance industry can repay after the Canadian claims are paid.

The challenge of flooding in high-risk areas presents a different insurance problem again. Modest annual premiums could offset potential losses for 80 percent of Canadians insured. But as our climate changes, we are seeing increasingly high concentrations of water falling in increasingly urban locations, and there is an evolution in areas that have now proven susceptible to repeated flood events.

Commercial flood coverage has been available for some time, and personal insurance coverage is now largely available to most consumers. However, consumers in “high-risk areas” face issues of affordability and availability. This type of insurance problem is best addressed through some form of support mechanism, but this issue also needs a firm government hand to ensure that support does not encourage more risky behavior (for example, more construction in known flood areas). The final solution also requires the government to invest public funds in mechanisms to support retrofit and significantly strengthen infrastructure in flood-prone areas.

Given the myriad problems that these various forms of tail risk events represent, it is unlikely that we will find a single mechanism designed to solve all of these risk transfer problems simultaneously. But, if nothing else, the COVID-19 pandemic has spurred an even greater conversation about these types of events. It’s a conversation that we need to have now. It is in the immediate national interest to develop practical solutions to the tail risks that Canada is most exposed to.

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