The devastating earthquakes of 2010 and 2011 highlighted some blind spots in the industry's underwriting and catastrophe modeling, Swiss Re said in a news article by A.M. Best.
"Looking back at the last two years, we've learned a number of lessons, but we feel the industry has been slow in digesting these lessons," said Balz Grollimund, head of earthquake, property and specialty for Swiss Re.
One "blind spot" was the damage caused by the tsunami that followed the March 11, 2011 quake in Northern Japan, he said. But tsumani damage is often not covered by earthquake insurance, and in fact may be covered by flood insurance which is also not purchased prevalently in many places in the world. The specific policy language here is vital.
"In hindsight it should not have come as a surprise that a tsunami could cause this loss, but we as an industry don't really model for tsunamis in earthquake in a systematic way," Grollimund said.
Analysis
We've now seen two devastating tsunamis in the last 7 years. The first hit under-industrialized areas in the Indian Ocean causing massive loss of life but not the propertty destruction seen in Japan in 2011.
Its possible that continuing climate change will intensify the occurrence and property damage of earthquakes and accompanying tsunami's. The insurance industry and its risk modelers must respond and adjust as Swiss Re suggests.
Business Interruption
Business interruption claims amounted to about half of the total insurance payout to industrial facilities in Chile following the February 2010 quake. In the pulp and paper industries, business interruption claims were two-thirds of the total payout, Swiss Re said.
Total insured earthquake claims for 2011 were $47 billion, the highest ever for the industry. Grollimund, one of the authors of the study, said the record losses came even as earthquake insurance penetration for most areas is low.
The exception is New Zealand, where earthquake insurance is mandatory. The February 2011 quake there caused $15 billion in economic losses and $12 billion in insured losses, so 80% of the losses were covered by insurance. In contrast, according to SwissRe, no more than 17% of damages for the Japanese earthquake in March 2011.
Swiss Re's Catastrophe Model
Swiss Re, which has its own catastrophe model, has now built a tsunami model for Japan and is looking to expand it to other countries including Chile, Peru, Ecuador, Mexico, Central America, and the Western United States.
"We consider risks on a case-by-case basis, but have already changed the approach to reflect tsunami risks in these regions," Grollimund said. Another blind spot for insurers was the damage caused by aftershocks, which can be bigger than the original quake, he said.
Lucia Bevere, Senior Catastrophe Data Analyst at Swiss Re Economic Research & Consulting and co-author of the publication, says: “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.
Bevere adds: “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.”
So, the takeaway is that without insurance coverage, post-disaster reparations come from government funds and ultimately must be borne by taxpayers-- at least until a greater emphasis is placed on owning earthquake insurance coverage.
