An early estimate from the Italian Civil Protection Department suggests that this weeks devastating earthquake in Italy, near the Umbrian town of Norcia, could result in economic losses of around $11 billion, but the insurance and reinsurance market loss will be significantly lower.
It’s now known that at least 250 people died in the magnitude 6.2 earthquake this week in Italy, and the region affected has been badly hit with many towns seeing a large proportion of homes and structures badly damaged or destroyed.
An initial report from the USGS suggested a 62% likelihood of an economic loss of over $1 billion, 35% of between $1 billion and $10 billion and a 21% chance that economic losses would be above $10 billion.
Aon Benfield’s risk modelling and analysis unit Impact Forecasting explained:
The USGS uses a computer simulation model that is designed to rapidly and automatically take into account the differences in proximity to populated areas, the depth of the earthquake, and building standards to provide initial analysis to governments and emergency management officials.
In its latest catastrophe update report, Impact Forecasting said; “The Italian Civil Protection Department released a preliminary economic damage loss estimate at USD11 billion based on an early review of the damage. However, this is subject to change and there will likely be fluctuations as entire assessments are completed.”
The event has now been placed under investigation by PERILS AG, the Swiss firm that calculates insurance and reinsurance industry losses. The firm will report on the event if the industry loss looks to be higher than its EUR200m reporting threshold.
Italy’s non-life insurance market is among the largest in the world and the fifth biggest in Europe, risk modeller AIR Worldwide said, but many homeowners policies do not cover earthquake risks and where homes are covered it tends to be through fire coverage.
Industrial and commercial cover for earthquakes is typically an add-on to a standard property policy, with penetration and levels of cover available varying by region.
The most affected region hit is mountainous and not a huge industrial centre, making homeowner losses likely the largest proportion of the property loss. However, small and medium business interruption losses could swell the eventual toll for insurance and reinsurance markets considerably, especially as recovery will be slow given the extent of the damage and the region continues to be hit by strong aftershocks.
AIR Worldwide said “Due to low take-up rates, insured losses are estimated to be less than 2% of the total economic loss due to earthquakes in Italy.”
Based on the estimate of an $11 billion economic loss, that would mean just a $220m loss for insurance and reinsurance markets. That does seem too low, based on damage reports emerging and also based on other Italian earthquake events in recent history.
Update: Fitch Ratings said that it expects the insurance industry loss, to Italian insurers, to be between EUR100m and EUR200m, with reinsurance firms taking the bulk of the hit.
As we wrote immediately after reports of the earthquake emerged, Impact Forecasting said that the May 2012 Emilia-Romagna region earthquakes, an M6.1 and M5.8 that occurred in a matter of days of each other, caused a combined economic loss of around $16 billion and an insurance industry loss of $1.8 billion.
So in that event around 11.25% of the economic loss fell to insurance and reinsurance markets to pay for. However that event was further north, in a region with far more commercial and industrial activity than the Umbrian area struck this week.
Impact Forecasting also explained that a magnitude-6.2 earthquake that struck in a similar region to this weeks earthquake in April 2009 in L’Aquila damaged or destroyed some 15,000 structures. That event saw economic losses of nearly $3 billion (2016 USD), with an insured loss much lower at $560 million (2016 USD).
But that is an 18.6% economic to insured loss ratio, with a higher proportion of the loss borne by insurance and reinsurance markets despite the fact the earthquake was in a more rural and less industrial region than the 2012 events.
So, with an economic loss estimate of $11 billion, even if 10% of the loss falls to insurance markets it would be $1.1 billion.
Still, these recent historical earthquakes in Italy do show that the majority of the loss will go uncovered, with the burden falling on local and national governments to help the population in the affected region recover.
It could be some time before a more accurate estimate of the economic loss emerges and before we have any clear view of the insurance and reinsurance industry impact. Whether any ILS funds are exposed is uncertain.
There remains a possibility of some collateralised reinsurance contracts or private ILS deals being exposed, as well as a chance that some losses could hit certain reinsurer sponsored sidecars or retrocession arrangements.
There is no doubt that ILS assets are exposed, with a number of large Italian insurers and international re/insurers exposed to the event which utilise ILS coverage. However any impact to ILS funds and investors would be expected to be minimal.