Time and time again, as our industry watches the news of an earthquake striking somewhere on the planet we're reminded of the large proportion of un-insured losses the population and economies have to cope with. This protection gap – the difference between total economic losses and insured losses – constitutes a huge problem both for low income countries as well as developed economies, where in spite of established insurance markets the un-insured losses often far exceed the amount of
A state of underinsurance of homeowners and their lenders persists in most earthquake prone countries. Many countries have intervened on the supply side by establishing earthquake pooling schemes such as California's CEA or Turkey's TCIP but have found that take up rates are stubbornly low. Homeowners tend to be deterred by high deductibles, high premium rates and lack of risk perception, especially given the low frequency of severe Earthquakes in any given place. Also, homeowners might be counting on government handouts, even though it's rarely realistic to expect substantial help with rebuilding a damaged or destroyed home.
The protection gap that homeowners face in respect of their earthquake exposure is truly alarming. Risk transfer could and should play an essential role in relieving communities that already suffer in so many ways from the fallout of the earthquake and reduce the compounding impact from property damage, business interruption, infrastructure and travel disruption, mortgage defaults and resulting drops in house prices. Given that the case for risk transfer away from homeowners in disaster zones is so strong, are there really no examples where it has been implemented successfully?
In fact, while there is a large protection gap in most earthquake prone countries, New Zealand stands out from the crowd in respect of protection of homeowners. Like many other countries New Zealand's government has implemented a pooling scheme to protect homeowners from earthquake risk. The so called EQCover is an insurance product that is provided by the "EQC" - the government's agency to handle all aspects of seismic risk the country faces (research, resilience as well as risk transfer). The scope is limited to residential properties, both land and dwelling, and is capped at NZD 100,000 whereas the value in excess of the cap is covered by private insurers.
The 2010/2011 Canterbury Earthquakes resulted in damage to over 150,000 homes, about three quarters of Christchurch's housing stock, and around a fifth exceeded NZD 100,000 in damage. Practically all of these residential losses have been covered by insurance. Much attention has been given to the claims settlement process, which turned out to be costly, complex and in many cases significantly delayed. However, the operational shortcomings should not distract us from the important fact that 90% of affected homeowners benefited from insurance coverage. Homeowners have been able repair or rebuild their homes and the local economy fared better than many expected. Notably housing prices remained stable in spite of the shock1.
What distinguishes New Zealand from other countries is that earthquake insurance is a mandatory endorsement to the fire policy. Consequently, it's effectively mandatory for homeowners with mortgages and for all others the penetration follows the pick-up rate of fire insurance, which is typically very high in developed markets. A regulatory requirement for Fire insurance to cover earthquake risk would not be uncontroversial as it would represent an additional upfront cost to consumers. On the other hand it can be argued that the insurance would only make the existing cost of being exposed transparent and thus manageable. In the absence of a regulatory requirement, a requirement by mortgage lenders to carry earthquake insurance would be more limited in scope but would still have a significant impact, especially in developed markets where mortgage lending is the most common form of financing residential housing.
New Zealand has shown us that we can protect ourselves better from natural disasters like earthquake. The question is are we going to take meaningful action and follow the example they are setting?
Category: Climate/natural disasters: Disaster risk, Earthquakes, Resilience