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Major B.C. earthquake could put ‘national economy in jeopardy’

A Conference Board of Canada study projected the costs of a magnitude-9 earthquake close to Vancouver.

DARRYL DYCK/The Globe and Mail

The economic impact of a large earthquake would lead to massive financial losses and "put the national economy in jeopardy," according to a new report.

The Conference Board of Canada projected the costs of a major earthquake off the coast of British Columbia over a 10-year period after the disaster and is set to release its findings on what happens if the earthquake is worse than insurers are currently equipped to deal with on Tuesday. Natural Resources Canada projections show a 30-per-cent chance that a significant earthquake will rock the West Coast in the next 50 years.

Pedro Antunes, deputy chief economist at the Conference Board, said the goal was to stress-test an earthquake that results in more than $30-billion in insured losses. That's how much the property and casualty insurance industry can conceivably handle. This would be equal to an event with a magnitude of 9 and close to a city. The findings show that there would be long-lasting economic losses not only for the West Coast, but also for the rest of Canada.

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Read more: How a massive earthquake would shake Canada's financial system (subscribers)

Read more: How Canadian scientists are preparing for the next big earthquake

Read more: How to prepare for an earthquake

The report comes a day after a large earthquake with an initial magnitude measured at 6.9 struck off the coast of Fukushima, Japan. It's near where a 2011 earthquake and resulting tsunami killed thousands and led to a nuclear disaster.

The Conference Board report notes that earthquakes that were larger than thought possible have not only hit Japan, but also New Zealand in recent years, meaning there's the "possibility of something larger and more devastating" happening in Canada, too.

The report considers the cost of destroyed property, deaths, lost jobs and the struggles to rebuild after a major earthquake. It also looks at how the insurance industry could be dragged down by a string of insolvencies, and how that impact could spread across the financial sector.

"We say [that] we can mitigate this risk with some kind of backstop system. And there are backstop systems in some other industries, including the banking industry," said Mr. Antunes, adding that the nuclear and oil and gas industries are other examples in which the private sector has agreements to work with the government in the case of emergency.

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Insurance Bureau of Canada funded the Conference Board study and has been sounding the alarm on the risks associated with natural disasters as flooding, wildfire, hail and other major catastrophes become more frequent and severe in Canada. A large earthquake is the only one that could bring the industry down.

"We wanted to paint a picture of what would happen to the economy, to Canadians at large," said Don Forgeron, head of the IBC. "This shows pretty clearly that it's a huge hit in terms of both real GDP, and the other piece is the cost to the federal and provincial treasury for not preplanning."

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By the numbers

$127.5-billion

The total economic cost of a major earthquake hitting the West Coast, if the event is any larger than the insurance industry's current capitalization levels can handle. This takes into account the expense of rebuilding public infrastructure as well as personal and commercial property. The majority of these losses would be absorbed by governments and taxpayers.

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$42-billion

The amount of losses that would be covered by property and casualty insurers. "Following an earthquake of this magnitude, insurer failures are indeed inevitable and there is a point at which the entire insurance industry is threatened," the report says. This is because if an insurer becomes insolvent under the industry's current system, other insurers are obligated to step in and backstop the losses, leading to a "widespread financial contagion."

437,000

The number of years that people working in Canada would collectively lose as a result of the devastation a large earthquake could cause. The study also breaks this out as a loss of 43,700 jobs for 10 years.

$133-billion

With employment income taking a hit and many people struggling to rebuild their lives, the report estimates that consumer spending would decrease by this amount over the decade.

$96-billion

If the insurance industry failed as a result of the earthquake, this would be the total loss in gross domestic product over 10 years, adjusted for inflation. The sum takes into account hits to the financial services industry, reduced business investments and a decline in household consumption.

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More

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