High risk of further damaging earthquakes in Chile

The chances of a damaging aftershock in Chile continue to be high after the 8.8-magnitude quake that rocked the country on 27 February 2010. Powerful aftershocks could hit the region for months or even years to come. As the next underwriting period gets underway later this year, insurers and reinsurers will have to consider the heightened risk of seismic events in their analysis and planning.

Since the February earthquake, the affected areas of central Chile have already experienced well over 300 aftershocks reaching magnitudes of  5.0 or higher. This is more than triple the total number of such forceful quakes witnessed in the region over the last ten years. New aftershocks could put at risk the urban centres of Santiago and Valparaiso, home to more than half of Chile’s population and most of its property values. Even a relatively modest earthquake of magnitude 6.5 to 7.0 could cause significant damage.

The likelihood of a damaging seismic event in Chile will remain well above average throughout 2010 and 2011. Corporate risk managers and underwriters must take into account this elevated threat level. The increase of earthquake activity is due to pronounced aftershock activity after large magnitude events. While these events typically would not reach the large magnitude of the main shock, they can nevertheless reach damaging magnitude levels.

The bulk of aftershock activity is occurring in close neighbourhood of the fault region of the main shock of February 27. The largest of these aftershocks observed up to now was a magnitude 6.9 earthquake on March 11, resulting in some additional damage. From a historical experience, additional damage such as this has been typically limited, as these aftershocks affect a building stock which has to some extent already been tested.

However, the area at risk from aftershocks also extends to areas north and south of the fault tips of strong earthquakes (see Figure 1). While a lot of aftershock activity is generated from very small magnitude events, larger magnitude events can also occur. In the particular case of the February 27 earthquake, aftershocks north of the fault tip would threaten the highly industrialised Santiago and Valparaiso region with more than 50% of population and all property values of Chile. Even a smaller Magnitude earthquake of M6.5 to M7 could result in significant additional or new damages to the building stock, without being catastrophic.

Implications for managing risks

For the coming underwriting year 2010/11, the probability for seismic activity in central Chile is significantly increased over long term averages. Existing risk models used by insurance and reinsurance underwriters only take into account average, long term risk. Corporate risk managers and underwriters need to be aware of this when recalibrating their risk appetite after the large event earlier this year and take into account the temporarily increased probability of a strong earthquake in the region.

Background and method used

When a large earthquake strikes, so-called aftershocks occur during months or even years in the same area. This phenomenon is well known and researched. The size and frequency of the aftershocks and the time period over which they occur depend on the size of the main earthquake – the greater the earthquake, the larger and longer-lasting the aftershocks. As with normal earthquake activity, the increased probability for small magnitude earthquakes is by orders of magnitude higher than for larger magnitude earthquakes. Also, an aftershock would typically not reach the magnitude of the main shock.

A well known example for this is the M9.1 Indonesia earthquake from 26 December 2004. One of its aftershocks on 28 March 2005 reached a magnitude of M8.7. The increased earthquake activity in the following 5 years has lead to a 60-fold number of victims compared to the 5 years before the main earthquake. Another example is the M7.6 Turkey earthquake on 17 August 1999, which was followed by a large aftershock of magnitude M7.2 to the east of the main shock on 12 November in the same year with casualties and significant property damage.