Small quakes, big impact: lessons learned from Christchurch
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Could a small aftershock in a city not considered an earthquake hotspot trigger one of the largest insurance losses ever? We answer these questions in the publication Small quakes, big impact: lessons learned from Christchurch.
The massive, and unexpected, insurance costs connected to the series of earthquakes that hit New Zealand's Christchurch region in 2010 and 2011 exposed blind spots in current views of financial earthquake risk. Estimates for the total economic costs continue to rise, with current insurance cost estimates for the 22 February 2011 6.3 magnitude (M) aftershock alone standing at USD 17.2bn – more than double the initial (risk model based) estimates.
Though the quakes were moderate in size and happened in an area not considered high risk, the only higher earthquake-related insurance losses over the last 50 years were the 9.0M Tohoku earthquake in Japan in 2011 and the 6.7M earthquake in Northridge (California, US) in 1994.
So, what happened in Christchurch?
As explained in the new Swiss Re publication Small quakes, big impact: lessons learned from Christchurch, several factors contributed to the higher-than-expected claims. These include difficulties in processing the huge number of claims, challenges in allocating losses to individual earthquake events, costly upgrades resulting from strengthened building codes, and special features of the policy wordings, such as unlimited replacement values. Many of these factors are not adequately considered by current risk assessment methods and the publication aims to increase awareness of this with direct insurers.
Could this happen again?
Given that a similar sized earthquake can occur virtually anywhere, it is vital that we learn from the Christchurch experience and address any protection gaps. Using Sydney, Singapore and Vancouver as examples, Small quakes, big impact: lessons learned from Christchurch highlights that the circumstances leading to high costs in Christchurch could almost certainly materialize elsewhere. Learning from the experience in Christchurch provides an opportunity to address current risk assessment gaps and prevent small quakes from producing chart-topping losses.