Calculating Disaster Insurance in B.C.
Who determines how much you should pay for disaster insurance in B.C.?
Cascadia – the region defined by a seismic fault line running north from California to Vancouver Island – is no stranger to the sort of catastrophic earthquakes that have rocked the Pacific Rim in the past year. Part of the so-called Ring of Fire, the world’s most active seismic zone, Cascadia experienced a major earthquake, on the scale of what shook Japan this spring, in 1700.
With estimates putting the cost of Japan’s latest quake at more than $200 billion, one has to wonder at the likelihood of a similar event in Vancouver, and the resulting price tag. Which raises the question: Who decides how much you pay to insure your home against such a disaster?
The simple answer: a computer. The ash-faced actuary of arid manner is in fact a software program that crunches hundreds of fields of data to determine how much any given homeowner in Vancouver – or anywhere else, for that matter – will pay for what’s known in the business as “shake” coverage. (Protection against fire or other losses stemming from earthquakes are in another class altogether.)
Eqecat Inc. of Oakland, California, which is releasing an update to its modelling software for Canada next month, combines information from the Geological Survey of Canada with site-specific information down to the level of specific postal codes to yield rates for coverage. Soil type, frequency and magnitude of quakes, building age, construction method (including building code provisions at construction), building type and occupancy are all factored in.
“It’s very important to understand the risk at a specific location,” says Tom Larsen, senior vice-president and product architect for Eqecat. “We don’t have a lot of data to see how these buildings perform, but we do know that the ground motion – the history and the evidence – is there, that you do have the potential for some infrequent great quakes.”
An insurer balances information about a specific property against the insurer’s overall exposure to potential claims. Companies typically keep a small amount of exposure on their own books and secure reinsurance (insurance against potential claims) to cover the rest. Reinsurance costs are distributed among policyholders, establishing the rate individual clients pay.
The good news is that an abundance of capital on global markets seeking a home has upped investors’ appetite for risk, bringing down the cost of reinsurance.
“We’ve seen, in the last three to four years, a stabilization and a slow reduction in reinsurance pricing,” says Chuck Byrne, executive director of the Insurance Brokers Association of B.C.
This should make coverage more attractive, but homeowners don’t necessarily ask for it. Quake coverage is not a standard endorsement in most residential policies. While some estimates peg coverage rates at between 40 per cent and 60 per cent, Richard Pindral, owner of Hyde Park Insurance Agencies Ltd. in Burnaby, estimates that a mere 10 per cent of his company’s clients have it.
“That is scary in itself,” Pindral says. “I myself for the last 20 years in B.C. have already had it on my home, knowing it’s a seismic zone. I have never had to put in a claim, but I am fearful of the big one happening one day, and my older home getting some structural damage.”
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