Chile earthquake expected to be a major insurance event

The 8.8-magnitude earthquake that struck Chile early February 27 was one of the most powerful quakes in recorded history, killing hundreds, destroying vast swaths of commercial infrastructure and causing damages to more than a million homes. According to first assessments, total economic losses could amount to over USD 15 billion. With insured losses reaching an estimated USD 4 to 7 billion, the earthquake is also likely to become one of the most expensive ever for the global insurance industry.

Chile is no stranger to violent earthquakes. Located along the Pacific Ring of Fire, one of the most active seismic zones on the planet, the country has experienced no less than 13 quake events of magnitude 7.0 or more over the last four decades. But the 8.8 magnitude earthquake, which affected about 2 million people, was a rare occurrence even on a global scale and because earthquakes more often than not occur farther away from any populated areas.

Fortunately, with its history of earthquake events, Chile was prepared. The country's well-developed building codes proved effective and were no doubt responsible for saving scores of lives and limiting the scale of devastation. While the Chilean quake was 500 times more forceful than the recent temblor that ravaged Haiti, its reported death toll of several hundred people to date is relatively low compared to the 250,000 people killed on the Caribbean island. Chile also boasts a comparatively high level of insurance coverage. A large share of the commercial value is insured against earthquakes. More than half of these assets are concentrated in the downtown areas of Santiago and Valparaiso, but they include large industrial plants and commercial sites outside the big cities as well. The country's insurance portfolio also comprises a considerable number of residential properties.

As of yet, it is too early to determine the exact losses from the February 27 earthquake. Based on preliminary assessments, total insurance payouts are expected to reach USD 4 to 7 billion. Anti-seismic features installed in properties across the country seem to have prevented the collapse of many buildings, but it is unknown how many of them suffered serious damage and will require major repairs or demolition. And since residential policies covering mortgaged apartments and houses make up a large percentage of Chile's earthquake insurance portfolio, damages to these types of properties will substantially add to the overall insured loss, together with damages to large industrial entities.

Despite Chile's readiness to withstand earthquake disasters, total losses to the Chilean economy could still be significant. According to some estimates, it may take the country three to four years to rebuild. The reinsurance industry is certain to play an important role in providing the financing needed to repay claims and drive the reconstruction efforts.

A useful overview of the affected area is available in CatNet. The intensity footprint provided by USGS can be overlayed with various geographic and economic data. CatNet is available for Swiss Re business partners free of charge.

Earthquake hazard (source: GSHAP), historic events in the chart to the left and the instrumental intensity (source: USGS) of the Maule event combined with the CRESTA zones in the chart to the right. All visualized in CatNet.

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