Swiss Re report shows global earthquake insurance penetration is low

A new report published today by reinsurer Swiss Re shows that earthquake insurance penetration is low globally, even in countries with high seismic risk. The report titled Lessons from recent major earthquakes discusses that some of the large recent earthquakes have made it apparent that much of the world is significantly underinsured for earthquake risk due to a lack of risk awareness.

Of the recent earthquakes to strike the globe the New Zealand and Japanese quakes stand out as prime examples of the lack of earthquake insurance in some countries. The earthquake in Japan caused economic losses of between $210 billion to $300 billion, while New Zealand’s 2011 quake event caused $15 billion in damages. However, in Japan just 12% to 17% of the loss will be picked up by the insurance industry compared to as much as 80% in New Zealand.

Other countries that show low levels of earthquake insurance penetration, but which are exposed to quake risk, include Italy, Turkey, Mexico and Chile.

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.”

Bevere added; “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.”

The report suggests that there are lessons to be learned from the recent earthquakes, some of which include factors that need to be considered for pricing and coverage purposes. Balz Grollimund, Head of Earthquake Perils at Swiss Re and also a co-author of the study, said; “Secondary loss factors, such as liquefaction and particularly business interruption, add to the complexity of claims assessments for major earthquakes. These factors should be considered more comprehensively in earthquake models.”

Earthquake insurance penetration will naturally rise over time as the developing nations of the world become more aware of the unique risk posed by quakes and as their economic exposure increases. This will lead to opportunities for the reinsurance and cat bond sector to assist in the risk transfer of quake risk to more suitable risk bearing parties.