Swiss Re Report Examines Insurance Role in Earthquake Disasters

By | January 17, 2012

Swiss Re’s new report – “Lessons from recent major earthquakes,” focuses on the most recent series of devastating quakes, which have caused extensive loss of life and injuries, along with widespread property damage, over the past two years. The report characterizes the cumulative catastrophic impact of earthquakes on society as “overwhelming.”

They are also very costly. Swiss Re notes that “seismic events caused economic losses of over $276 billion in 2010 – 2011. However, the report also points out that “highly earthquake-prone countries remain underinsured.”

Lucia Bevere, Senior Catastrophe Data Analyst at Swiss Re Economic Research & Consulting and co-author of the publication, stated: “The insurance industry is playing a key role in post-disaster financing of the countries affected. While insurance cannot replace lost lives and livelihoods, appropriate insurance and other risk transfer mechanisms can greatly accelerate the recovery process.”

However, the insurance industry’s contribution to the reconstruction effort differs dramatically from country to country. As an example Swiss Re notes that the “insurance industry will pay an estimated 80 percent of the overall cost of the February 2011 earthquake in New Zealand, but no more than 17 percent for the disastrous event in Japan in March 2011.” Earthquake insurance penetration, in fact, is highest in New Zealand, but it is very low in Japan, particularly for commercial properties.

In addition the report highlights the fact that “overall, earthquake insurance coverage is still quite low, even in some industrialized countries with high seismic risk. Low insurance penetration attests to a population’s low perception of risk.”

Bevere explained that the “low frequency of earthquake events, compared to other natural catastrophes, tends to shape the perception that earthquake risk is much lower than it actually is, even in places where there have been very deadly and damaging occurrences, like California.”

If there’s insufficient coverage, “post-disaster reparations come from government funds and ultimately must be borne by taxpayers.”

The most recent earthquakes have enhanced the need for more accurate underwriting. Swiss Re noted that earthquake models are generally quite accurate in predicting the immediate physical damage caused by tremors.

However, Balz Grollimund, Head of Earthquake Perils at Swiss Re and co-author of the study, pointed out that “secondary loss factors, such as liquefaction and particularly business interruption, add to the complexity of claims assessments for major earthquakes. These factors should be considered more comprehensively in earthquake models.”

Source: Swiss Re

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