Lessons from recent major earthquakes

Pre-disaster financing mechanisms, such as insurance, earthquake awareness among the general public, and the importance of earthquake modelling are just some of the issues addressed in “Lessons from recent major earthquakes,” Swiss Re’s latest sigma expertise publication.

The 11 March 2011 earthquake that struck northern Japan was one of the most powerful to ever hit the country and the fourth-strongest worldwide since 1900. However, the tremor was just one of a series of devastating earthquakes in the past two years: Haiti, Chile, New Zealand and Turkey have experienced strong quakes that caused millions of dollars in damage and killed thousands.

These earthquakes, and their impacts, highlight a list of issues that should be addressed on a global scale. “Lessons from recent major earthquakes,” a sigma expertise publication available for download (PDF, 917 KB), analyses these issues.

Earthquake insurance coverage

Even though the recent events have raised earthquake risk awareness, insurance coverage is still quite low, not just in emerging markets but in industrialised countries as well. This results in a dependency on post-disaster financing and increased government intervention.

Due to the absence of widespread coverage in some areas, public sector funding also plays a major role in recovery. This means the cost of rebuilding must ultimately be borne by the taxpayer.

Public awareness is essential

According to “Lessons from recent major earthquakes,” the low frequency of earthquakes has created the perception that earthquake risk is low. This in turn leads to fewer people buying earthquake insurance.  Complexity, or perceived complexity, in earthquake insurance pricing may also serve as a deterrent to consumers.

Raising awareness of earthquake risks and insurance among the public is of the utmost importance. Governments and insurers can play a part: the former by enacting stringent building codes and requiring earthquake insurance, especially in high risk areas; the latter by simplifying pricing structures.

Modelling and secondary loss

Earthquake models play an important role in helping underwriters assess risk in insurance portfolios. These models do a good job of predicting shock losses, but as recent earthquakes have shown, the impact of secondary agents such as tsunamis, aftershocks, liquefaction and business interruption is frequently underestimated.

Secondary losses contributed significantly to overall losses in the Chile, New Zealand and Japan earthquakes. Underwriters should be aware of the limitations of earthquake risk models and acknowledge the need for sound decision making assessing risk.

Find out more

Download “Lessons from recent earthquakes”

Published 17 January 2012

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