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When the earth starts to shake, preparedness is everything. Measures such as building codes and emergency evacuation plans can make all the difference. They significantly increase the odds of saving lives in the event of an earthquake. Considering that many of the world’s major cities are located in quake-prone areas – from Tokyo to Istanbul, Mexico City or Los Angeles – the importance of such measures cannot be stressed enough.
Saving lives is top priority, coping with catastrophic losses a close second
Yet, even the most stringent measures cannot prevent all possible damage. This is why millions of people and businesses around the world remain heavily exposed to potentially large financial losses caused by earthquakes. There is of course the immediate risk to homes, offices and physical infrastructure. But often overlooked are the costly ripple effects: destructive aftershocks, tsunamis in coastal regions, landslides and subsidence, not to mention production stoppages and disruption to global supply chains.
This is where insurance comes in. Unlike physical protection measures, insurance cannot prevent the loss of life. But insurance can make all the difference when it comes to the question of whether or not the economic damage from an earthquake poses an existential threat to those affected. It plays a key role in helping people and businesses get back on their feet and allowing the economy to recover swiftly after an earthquake. Online tools such as Swiss Re’s CatNet® provide information on where earthquakes are likely to occur, what the loss potential is in any given location and how to price earthquake risk when developing insurance solutions. In recent years, the insurance industry has created more sophisticated earthquake models and given greater attention to losses associated with business interruption and industrial production shortfalls.
Closing the protection gap – still a challenge
In spite of these recent advances, however, a significant gap in coverage for earthquake risk exists around the world. Even in earthquake-prone areas, insurance take-up rates continue to be low. In Mexico, for example, only about 5% of homes carry earthquake insurance. When in September 2017 two of the most powerful earthquakes hit the regions of Tehuantepec and Puebla in the span of two weeks, close to 500 people lost their lives and over 142 000 properties were damaged. The total economic loss amounted to over USD 12 billion, but only USD 1.6 billion was insured.
Last year’s tremors in Mexico reveal a significant protection gap in a country that faces high earthquake risk and where the government has been working hard for years to promote disaster preparedness. While there is clearly more work to be done, the government’s efforts have paid off: the events also confirmed that, when enforced, zoning laws and building codes do work. Most of the buildings that did collapse or were severely damaged had been built before 1987 when new anti-seismic provisions were introduced. By contrast, those that withstood the impact had been constructed in accordance with newer standards.
It is a similar story in Italy where only 1% of residential buildings are insured against earthquake risk. The last major quakes to hit central Italy in 2016 caused combined economic losses of USD 6 billion, of which only USD 200 million were insured. Historically, the Italian government has intervened with disaster emergency relief and reconstruction measures. But in light of already overstretched public budgets, this is an option that is becoming too costly and ineffectual.
An integrated risk management approach is vital
The insurance industry has the knowledge and financial capacity to step in and close the ever widening protection gap. It can only do so, however, if the risk from earthquakes is addressed through an integrated risk management approach that combines risk prevention and risk transfer measures. That means working together with the public sector to systematically identify seismic risk, draw up potential scenarios and raise awareness. In addition, it is necessary to quantify all risks, taking into account their potential loss amounts and probability of occurrence. The next step is to discuss the residual risk and clarify how the potential financial losses can be covered. This is particularly challenging in the case of wider secondary impacts, such as disruption to business and supply chains.
Innovative digital solutions offer new options
An integrated risk management strategy ensures that insurance options stay available and affordable. Besides traditional indemnity-based insurance covers, parametric solutions are increasingly becoming an attractive alternative to protect against earthquake risk. Parametric covers are based on a pre-defined index, such as the magnitude of an earthquake, and trigger payment when that threshold is reached. In Turkey and Japan, for example, Swiss Re has been offering index-based earthquake covers for business interruption for some time.
Unlike traditional insurance, parametric products no longer require any loss adjustment in the event of an earthquake. Payouts are quick and administrative costs are low. Increasingly, insurers and reinsurers like Swiss Re are offering parametric products as part of a fully automated, cloud-based insurance solution. Features are modular and include real-time reporting, dynamic pricing and automated claims payments. In fact, there’s no need for lengthy claims procedures, since payments are made instantaneously when a predefined trigger is reached.
Building resilience on shaking ground
Major earthquakes such as those experienced in recent years in Japan, Mexico, Haiti or New Zealand remain exceptional. But they serve as a stark reminder that a destructive tremor can strike without warning in any of the world’s earthquake zones. Being prepared is the best option to keep safe. Insurance can help people and economies rebound quickly after the shock. New product innovations have opened up the possibility of bringing affordable insurance protection to many more communities around the world. Together, let’s make things happen and turn this possibility into reality