FROM HAITI TO JAPAN Fourteen Months of Major Earthquakes and What They Mean to the Global Insurance Industry. May, 2011.

Transcription

1 FROM HAITI TO JAPAN Fourteen Months of Major Earthquakes and What They Mean to the Global Insurance Industry May, 2011 Sponsored by:

2 FROM HAITI TO JAPAN Fourteen Months of Major Earthquakes and What They Mean to the Global Insurance Industry In any given year, there are scores of earthquakes, most barely significant enough to rattle a teacup. But since January 2010, the globe has been rocked by eight quakes of magnitude 6.1 or greater, one of which was 9.0. Two resulted in enormous loss of life and many caused significant property damage. In this special report, we examine this phenomenon and its impact on the global insurance industry, as well as on disaster modeling. We will also look at how U.S. earthquake insurance coverage may be re-evaluated, particularly in the wake of the devastating March 11, 2011 earthquake in the Tohoku region of Japan. From Haiti to Japan On January 12, 2010, Haiti was rocked by an earthquake that measured 7.0. According to the U.S. Geological Survey 1, 222,570 people were killed and another 300,000 were injured. Property damage was vast, with 97,294 houses destroyed and 188,383 damaged. That was the first of a string of quakes in It was followed by a magnitude 8.8 quake south of Santiago, Chile on February 27 that had perhaps as many as 130 aftershocks in its wake, 13 of which had a magnitude greater than 6.0. New Zealand was struck by a 7.1-magnitude quake in a sparsely populated area of its countryside in the fall. But it was not as fortunate on February 21, 2011, when Christchurch, the largest city on its south island, was rocked by a magnitude 6.3 event. More than 160 people died and perhaps as much as a third of the buildings in its central business district were so damaged that they will have to be demolished. Though damaging, the two New Zealand quakes were, however, a fraction of the destructive power of the magnitude 9.0 quake and tsunami that leveled northeastern Japan on March 11, 2011 and which continues to jolt seismic monitors and world financial markets. 2 Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by:

3 15 Months Of Quakes Major quakes by location and magnitude Date Location Magnitude 01/12/10 Port-au-Prince, Haiti 7 02/27/10 Pellehue/Maule, Chile /08/10 Başyurt, Turkey /11/10 Pichilemu, Chile /14/10 Yushu, China /04/10 Canterbury, New Zealand /22/11 Christchurch, New Zealand /11/11 Tohoku, Japan 9 The Ring of Fire Since earthquakes began to be widely tracked in the 1930s, the number of major quakes that have occurred each year has been fairly stable What is going on here? Are quakes increasing in frequency and power? Are there underlying environmental or geological issues that are throwing the earth off kilter? The answer, for the most part, is No. Since earthquakes began to be widely tracked in the 1930s, the number of major quakes that have occurred each year has been fairly stable 2. The U.S. Geological Survey says the annual pattern has been about 18 major earthquakes those of a magnitude between 7.0 and 7.9 with one quake above 8.0. The areas of high seismic activity have remained constant too, with the so-called Ring of Fire zone, which hugs the nations bordering the Pacific Ocean from Australia all the way around to Argentina, being far more active than geologically stable regions, such as northern Europe or the eastern seaboard of the United States. Magnitude 9.0 quakes, like the one that hit the Tohoku region of Japan, remain rare. There have been just six others since 1952 worldwide. We are, however, much more aware of every quake that occurs. Advances in earthquake monitoring technology now mean that scientists are able to record many more quakes every year: The USGS s National Earthquake Information Center listed 47 around the world on March 19, 2011 alone, ranging in magnitude from 3.0 to 5.9. The general public knows about more quakes as well, thanks to the spread of the Internet and global telecommunications. News of the Tohoku quake was around the globe within minutes of the initial shock. But two other factors make earthquakes seem larger in the public consciousness: The increase in Earth s population and the infrastructure needed to support that population. There are more people and more insurable infrastructure in the path of every possible fault line. Consider that, in 1930, the population of Tokyo was just 5.4 million; by 2009, the city had 3 Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by:

4 grown to roughly 13 million inhabitants 3, a population that lives and works in large buildings and relies on a extensive network of utilities and supplies to lead their daily lives. The Damage Toll Estimates of the total insured loss from the Tohoku event range from $21 billion to as much as $39 billion And so the toll from modern quakes can be staggering. According to Eqecat 4, a Californiabased company that provides catastrophe risk modeling and consulting, the earthquakes of 2010 killed more than 225,000 people and resulted in insured losses of more than $10 billion and economic losses of $40 billion. The Tohoku quake and the accompanying tsunami killed 15,093 people and more than 9,000 were, as of mid-may, still reported as missing 5. They also destroyed or damaged thousands of residential, commercial and factory buildings, disrupted transportation and caused a nuclear power plant accident as serious as Chernobyl 6. Estimates of the total insured loss from the Tohoku event range from $21 billion to as much as $39 billion. 7 Towers Watson has estimated the financial loss to be in the range of $300 billion, triple the damage of Japan s last major earthquake, the magnitude 6.5 quake in Kobe in In April, the Bank of Japan downgraded its economic growth forecast for fiscal 2011 to 0.6% from 1.6% 9. Even when quakes occurred in highly populated regions, their impact can vary greatly. Less stringent building codes and a lack of adherence to those codes appears to have led to a high death toll in Haiti. While the February 27, 2010 quake in Chile was the fifth largest in 4 Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by:

5 that country since 1900, the human toll was far smaller because inland buildings remained structurally sound, as did dams and levees. Waterfront areas, however, suffered from liquefaction, where the saturated soil loses its strength under an earthquake s shaking. According to a report sponsored by the U.S. National Science Foundation 10, liquefaction compromised structures at Chile s key port facilities, as well as bridges, railroads and road embankments. There was also significant damage to Chile s primary north-south highway. And even before the Christchurch and Tohoku quakes this year, the world s seismic activity was reverberating through the catastrophe bonds market Tsunamis were also a factor in the Pellehue/Maule quake death toll, though not to the extent of the Tohoku quake, where water overcame sea walls and reached levels of 124 feet 11. The Japanese tsunami was felt as far away as northern California, where it destroyed the harbor at Crescent City. The damage to America s West Coast would likely have been far worse had the tsunami hit at high tide instead. 12 The damage done by all these quakes has most certainly rattled the world of insurers and reinsurers too. Many of these companies have warned of losses in coming results, and analysts at Keefe, Bruyette & Woods recently stated that the first three months of this year will go down in the record books as among the worst in global underwriting history. 13 Yet, the toll from the Japan quake on the insurance industry may still not be as large as it could have been because less than 20% of Japanese consumers have earthquake insurance and nuclear reactors are covered by a global government insurance pool. Japanese insurers and the Japanese government will have the responsibility of paying for home and health insurance claims, while many of the business claims will fall to international insurers. RMS, a catastrophe modeling company, has estimated business claims at perhaps as much as $9 billion. 14 U.S. insurers will face far less exposure than they did with Hurricane Katrina, which did $81 billion in property damage. And even before the Christchurch and Tohoku quakes this year, the world s seismic activity was reverberating through the catastrophe bonds market. Munich Re reported in January 2011 that $5 billion in catastrophe bonds were issued in 2010 and that new issues in 2011 could reach as much as $6 billion. The company said that the current low interest-rate environment will continue to make catastrophe bonds attractive to major institutional investors including pension funds. It noted that major traditional investors now account for more than 20% of the catastrophe bond market, up from 5% as recently as No Room for Complacency U.S. insurers may have other reasons to be wary of earthquakes, however. Paul Thenhaus, a geologist at Eqecat, says that scientists had not expected a 9.0 quake in the Tohoku region 5 Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by:

6 because quakes of that magnitude typically happen where the breaks in the earth s crust are newer. Magnitude 9 quakes are expected in Chile, says Thenhaus. We saw one in Chile in The May 22, 1960 quake at Valdivia is, at 9.5, the most powerful earthquake ever recorded. The reason is that the country borders on a much younger tectonic plate, the Nazca plate, which makes it a zone that seismologists call warm. The Maule earthquake wasn t much of a surprise, says Thenhaus, referring to the strength of the February 27, 2010 event. Seismologists also must puzzle over the way in which the Tohoku quake happened. They had expected the plates in the Honshu area to rupture in limited, independent segments, as had been the pattern in the past. But this time, Thenhaus says, the rupture cascaded through all the faults, ultimately encompassing a zone as large as Indiana. Of particular concern is the Cascadia Subduction Zone, a fault that extends from Vancouver Island to northern California that is thought to be most at risk for a Tohoku-size quake Nobody had anticipated that all the faults would cascade together, he says. Now we know that it can happen, we have to rethink things. There will be a reevaluation, particularly in the circum-pacific regions. Of particular concern is the Cascadia Subduction Zone, a fault that extends from Vancouver Island to northern California that is thought to be most at risk for a Tohoku-size quake. More than 15 million people now live along the fault, and a rupture, particularly if it is accompanied by a tsunami, would cause significant damage to Vancouver, Seattle, Portland and the San Francisco Bay area. Seismologists are also reevaluating the New Madrid fault, a zone under the Mississippi where the borders of Missouri, Illinois, Kentucky and Tenessee come together. It was the site of one of the four largest earthquakes in north America in But Thenhaus cautions that this is going to be very painstaking research that could take more than a decade to complete. Seismologists must review reams of data from an ever-expanding network of monitoring stations and consider the historical records of earthquake occurences to reexamine their thoughts about frequency. We can t go around saying there will be magnitude 9 earthquakes all over the place, he says, adding that even if some seismologists believe strongly in the possibility there will likely be opposing views. It will take time for a new consensus to develop, he adds. Thenhaus notes for example that, in recent years, paleo-seismologists working in Japan believed they had evidence of an earthquake-generated tsunami that occurred in the Tohoku/ Sendai region in the year 869 that might have been as large as the one that occurred in March But the organization in Japan that produces the seismic hazard maps judged 6 Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by:

7 the information too speculative to include. Risk modeling companies base their guidance in large part on these kind of hazard maps and they usually agree to a large extent; had one opined that a magnitude 9.0 quake was possible in northeastern Japan, the assessment might likely have been dismissed as unfounded. Waiting, Watching, Planning The lesson to be drawn from the globe s massive quakes is clear. What happened in Japan, Chile, Haiti and New Zealand can happen in the United States That does not mean that U.S. Insurers will be laying low until the new assessments are completed. Even though the last major quake on the New Madrid fault was 1895 and the last event on the Cascadia fault was well before the Pacific Northwest became the major business and technology hub that it has become today 1700, to be exact insurers are working to get a new perspective on their policies. They have come to realize that they must formulate new coverage guidelines, and pricing policies, and that they need new tools to do so. Many companies writing in earthquake prone areas do not have the level of detail they should have, says Dan Munson, the Founder for RiskMeter, a company that specializes in geographic underwriting information for insurers. Munson notes that insurers often rely on broad, county-level assessments that either rule out or rule in large areas, when they need more specific information about earthquake conditions that could jeopardize structures on a location-by-location basis. A county map is not sufficient, adds Munson. There may be areas of good soils there, and areas of soft soils close by. They can lead to very different losses, even between locations that are very close to one another. Our tools give insurers the opportunity to be more sophisticated with their underwriting. The lesson to be drawn from the globe s massive quakes is clear. What happened in Japan, Chile, Haiti and New Zealand can happen in the United States. It is entirely possible for America to have a major quake in several regions, with devastating impact on lives and infrastructure. Pacific quakes could cause previously unimagined damage to Hawaii, California, Washington and Oregon. The time is now, Munson says, to assess possible losses and blunt their impact. These risks are real. What happened in Japan can happen here and we can prepare for it. We can help people to be proactive in managing risk rather than counting losses. In this business, companies that can better select and price risk win. 7 Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by:

8 About RiskMeter.com For property underwriters and agents who are looking to increase accuracy, productivity and overall speed of operations, the RiskMeter Online is an Internet application used to automate property risk reports. The RiskMeter Online provides over 30 real-time reports, including Distance to Coast, FEMA Flood Zones, Rating Territories, Windpool Eligibility, RMS & EQECAT Data & Analytics, Individual AAL & PML Reports, Earthquake information and much more. Information is available through a web browser, in batch, and as a web service. For more information or to get a FREE trial account, call , dmunson@cdsys.com or visit ABOUT ADVISEN Advisen s data, analytics and news offerings are game-changers for 100,000 commercial P&C professionals. For Underwriters, Reinsurers, Brokers and Risk Managers, the resources of Advisen provide productivity and insight into underwriting, marketing, broking and purchasing commercial insurance. Configurable applications allow Advisen to customize each solution and/or craft special offline delivery, too. Our result is a measurable increase in your book of business and more favorable insurance transactions. Visit us at or contact support@advisen.com to learn more. NOTES 1: U.S. Geological Survey, Magnitude 7.0 Haiti Region, us2010rja6/#summary. 2. U.S. Geological Survey, Earthquake Myths, 3. Tokyo Metropolitan Government, Population of Tokyo, National Police Agency of Japan, Damage Situation and Police Countermeasures associated with 2011 Tohoku district off the Pacific Ocean Earthquake, U.S. National Science Foundation, Geo-Engineering Reconnaissance of the February 27, 2010 Maule, Chile Earthquake, Earthquakes and the Global Insurance Industry Advisen Ltd. Sponsored by: