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The Vancouver skyline at sunset, January 20, 2010.

JOHN LEHMANN/John Lehmann/The Globe and Mail

Insurers are warning Canadian governments and the country's financial regulator that a large earthquake will cause significant damage, and possibly a high death toll, unless buildings and infrastructure such as bridges and sewers are brought up to snuff.

The insurance industry is particularly concerned that Ottawa is not paying enough attention to this issue and making preparations.

Fairfax Financial Holdings Ltd., an insurer, is so worried that it has approached regulators such as the Office of the Superintendent of Financial Institutions. The general attitude that "it's never happened, so why worry about it" is dangerous, Fairfax CEO Prem Watsa said on Thursday. "This is the time to worry about it."

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He and others are calling on the federal government to partner with the insurance industry to make certain that enough is done to prepare for a quake, especially in British Columbia. A serious quake could mean substantial losses for the industry.

Insurers want vulnerable old buildings retrofitted or rebuilt, including schools and hospitals; all fire halls made earthquake proof and water sources inventoried; investments made in electricity and transportation systems; and more federal preparation for an emergency response.

OSFI, which is tasked with protecting the solvency of banks and insurers, said it recently formed a working group with the Insurance Bureau of Canada, an industry association, to re-evaluate the regulator's guidelines on earthquake exposure. That group is expected to issue final recommendations in April.

In the meantime, the regulator said it believes that insurers' balance sheets could withstand a serious quake because the companies are generally holding enough reinsurance to offset their risks (reinsurance is essentially insurance bought by insurers).

"Canadian [property and casualty insurance]companies take earthquake risk seriously and have good governance and risk-management practices in place to manage the risks," said OSFI spokesman Rod Giles. "The international reinsurers, who bear most of the Canadian earthquake risk, have the financial resources to respond to an earthquake in Canada."

A new report from a think tank created by the industry says that decades of underinvestment in public infrastructure mean the aftermath of a quake would be much worse than it needs to be.

Canada has more than 4,000 earthquakes each year, but most are so small they can be felt by monitoring equipment only. There is at least a 30-per-cent chance that an earthquake strong enough to cause significant damage will strike Southwestern British Columbia in the next 50 years, and a 5- to 15-per-cent chance that a damaging quake will strike in Southern Quebec or Eastern Ontario during that time, says the report by the Institute for Catastrophic Loss Reduction, which is affiliated with the University of Western Ontario.

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"It is inevitable that a major earthquake will strike Canada," it says.

Twenty to 50 per cent of the economic losses after an earthquake will be caused by interruption of business activity due to failure of critical infrastructure, adds the report, which was sponsored by Lloyd's of London.

"It's not a matter of if, it's a matter of when, I'm afraid," Richard Ward, the CEO of the British-based insurer, said in an interview this week.

The industry is likely speaking with a degree of self-interest when it flags risks such as this, against which companies and individuals can buy insurance. And it is certainly seeking to minimize its potential losses from such a disaster by pushing the government to prepare. But insurers such as Lloyd's, which has insured everything from the Titanic to the World Trade Center and the planes that hit it, have been forced to become experts at identifying such risks to protect themselves.

"Our job is not to be a scaremonger, it's not to frighten people," Mr. Ward said. "What we're trying to say to people is, 'make sure you understand your risks, even if they're remote.' If you don't understand your risks, you can't manage them."

The ICLR report points to the different experiences in Haiti and Chile in recent earthquakes. Haiti, which was unprepared, was hit by a magnitude 7 quake in January and suffered catastrophic damage, including nearly 250,000 deaths. Chile's February quake was magnitude 8.8, making it the fifth strongest earthquake on record, and yet the death toll was well below 1,000.

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