Currently showing: Climate/natural disasters > Disaster risk

11 Apr 16 11:23

Usually, earthquakes are all about numbers. Take the earthquake that occurred in Nepal in April 2015. The total economic loss is estimated to be around USD 6 billion. That's almost a third of the Nepalese GDP. Only an estimated USD 160 million of the loss (2.7% of the total loss) was insured. Even more tragic was the fact that 9.000 people lost their lives. The Tohoku earthquake in 2011 claimed 16.000 lives and caused an economic loss in excess of 200 billion. That same year, the New Zealand earthquake claimed almost 200 lives and caused more than USD 15 billion worth of damage.

These numbers are distressing but they are only part of the story. They are a snapshot of what happened in a matter of seconds. While the actual earthquake only lasts moments, the effects are long-term. Once the earthquake is over and the casualty numbers are known, global interest fades quickly. However, it is exactly then, when global interest fades, that the consequences for affected people and local economies become apparent.

It is especially those long-term effects that tend to be forgotten. A major earthquake is a disruptive event that can change our lives forever. Earthquakes occur unexpectedly which separates them from other perils. You can see a hurricane coming but not an earthquake. Of course, we know that some areas are more exposed than others. Yet, it can take decades or centuries before the next earthquake strikes even in exposed locations. This extreme irregularity makes earthquakes so unbelievably difficult to grasp. The consequence: most people ignore the threat until it's too late.

Most people are not covered against earthquake risk. Insurance doesn't help to mitigate the emotional stress and cannot make up for lost lives but what it can do is mitigate the long-term impact on communities and the economy.

Swiss Re recently published a study about earthquake risk in Switzerland and the potential impact on banks. Whilst analyzing the information, I caught myself thinking: the expected loss in Central Switzerland could reach CHF 17.6 billion. This is less than 3% of Switzerland's GDP. With a loss of 3% of GDP the country will surely cope.On a macro level, Switzerland can absorb an economic loss of 3% of GDP but the loss is not only about the macro level, it is also about the local and individual level. Some people will lose family members, some will lose their homes. Homes can be rebuilt but what happens when your home is destroyed but the mortgage of CHF 600.000 is still standing?

What if that same person just lost their job because the company property was destroyed and decided to rebuild somewhere else? What if those people with no job and no home leave the community and never come back? What if those people who stay spend all their income on reconstruction and cannot support the small businesses of the affected region anymore?

Insurance cannot solve all issues associated with catastrophes but it can help mitigate them. If above person had only spend a small fraction of their income on earthquake cover, they would be able to rebuild their homes and lives without taking on additional credit and become over-indebted. They would still have disposable income to support the local economy and might be more inclined to stay instead of moving somewhere else.

While the case for earthquake insurance is obvious, insurance penetration is still very low. The threat seems remote, although there has been a major earthquake almost every year somewhere in the world (2015 Nepal – 9.000 victims, 2014 China – 731 victims, 2013 Pakistan – 400 victims, 2011 Japan and New Zealand – 19.000 victims, 2010 Haiti – 222.000 victims). We don't believe an earthquake will hit right where we are. It's always somewhere else – until it isn't.

Earthquakes are not just about the numbers. We tend to look at them from a global perspective but that is not what people are confronted with after an event. The individual fates and difficulties to cope with the situation have little to do with the macro level. It's exactly these consequences earthquakes are about and should be put into the center of our attention.

Category: Climate/natural disasters: Disaster risk, Earthquakes, Resilience

1 Comment

Waldemar Razik - 12 Apr 2016, 10 p.m.

I think this underinsurance phenomena is related to a private person's perception of the distribution of the expected next-year loss and real life verification of the actual loss which happens to a person within one year horizon -- and in accordance with the probability distribution function usually nothing happens during one year period of underinsurance, so why bother buying a policy?

To compare:

a) health insurance for minor health issues, which is usually perceived as a subscription service or an option to visit a general practitioner is bought quite frequently. And cases of seasonal illnesses happen quite often to us or to people known to us, so insured events are realistic and usefulness of the policy is tangible.

b) health insurance for serious health deterioration events including death -- this kind of events is related to rare situations, which happen not frequently and usage of the bespoken policy is rather intangible. And in perception of some people, any such serious event can be considered as so badly overwhelming, that even payout from the policy wouldn't help much.

And well qualified insurance advisors know how to unscramble their customers from such a way of thinking. and as I have witnessed it is done in small steps by upselling insurance products one by one. So let's keep fingers crossed for the well educated sales force at the insurance companies.

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