Earthquakes

A deadly threat

Loss burden dependent on many factors

Of all natural disasters, earthquakes pose the greatest threat to life and limb and can cause enormous financial losses. Nearly half of all natural catastrophe fatalities since 1980 have been caused by earthquakes or the tsunamis they have triggered. Munich Re understands the risks involved and participates in initiatives designed to make buildings more earthquake-resistant and to improve people’s financial security through insurance.

US$ 210bn

The costliest natural catastrophe of all time:
The Fukushima nuclear disaster of 2011 in Japan was triggered by a tsunami following an earthquake

More than 90% of all earthquakes occur in regions where large tectonic plates meet. Many active volcanoes are to be found in the same regions.

In convergent zones, oceanic plates push themselves under continental plates. This is called a subduction zone, for example off the South American Pacific coast.

In the case of transform faults, on the other hand, tectonic plates push against each other in a side-to-side motion. An example of this is the San Andreas Fault in California.

Owing to the different degrees of stress build-up, convergent zones produce the strongest earthquakes (Chile, 1960; Sumatra, 2004), followed by transform zones (San Francisco, 1906), and divergent zones. Since the hypocentre of quakes on convergent plate boundaries is often in the sea, these strong quakes account for less than 30% of overall global earthquake losses. There is a significant risk they will trigger a tsunami.

Nine out of ten earthquakes occur in regions where large tectonic plates meet

The loss generated by an earthquake is determined not only by the earthquake parameters themselves (magnitude, distance, duration), and the local subsoil conditions, but also by the characteristics of the affected buildings: type of design, type of building, occupancy, year of construction, height, asymmetries in the floor and elevation plan, resonant frequency (Mexico City effect), and other factors.

Stronger earthquakes frequently cause knock-on effects with high loss potentials. These include seismic sea waves (tsunamis), such as those that caused such devastation in the Sumatra quake of 2004 or in the Japan quake of 2011. They can also cause landslides, subsidence and ground liquefaction, which can produce extremely high losses.

On the basis of current scientific knowledge, it is not possible to predict the exact time and location of earthquakes. There are a number of phenomena that are frequently observed before earthquakes but when and to what extent they occur varies.

Loss prevention is key

The most important prevention measures relate to engineering design features to protect buildings against earthquake forces. This is usually regulated by national building codes. The aim of most earthquake-related regulations is first and foremost to protect human life. They ensure structural stability whilst accepting that some property damage may occur. However the new generation of building codes, such as those in use in the United States, Japan and New Zealand, also endeavour to reduce property damage. Planning measures such as the selection of appropriate sites with a view to avoiding highly exposed areas are often ignored.

Underwriting aspects

There are many areas with high concentrations of values and population that are also located in zones of very high seismic activity. In highly exposed areas with great concentration of values and high insurance penetration, the insurance industry faces a major challenge. This makes it all the more important to gain an objective impression of the exposure. Only with this as a basis can the most appropriate prevention measures be implemented, for example realistic premium calculations, accumulation controls and the establishment of reserves, or structural improvements and land-use restrictions.

GEM earthquake map — The Global Earthquake Model makes it possible to evaluate the earthquake risk in every country

Earthquake insurance is generally taken out as a supplement to traditional fire insurance cover or as a component of an EC (extended coverage) policy. Substantial deductibles to limit indemnity and loss accumulation are a precondition for the insurability of the earthquake risk. Compared with windstorm, earthquake (like flood) has only attained a low level of insurance penetration in global terms.

Poorer countries in particular require a massive increase in earthquake insurance in order to lessen the financial impact of quakes and to speed up reconstruction. To help realise this, Munich Re has been a supporter of the Global Earthquake Model since 2007.

GEM is a joint initiative started by leading geo research centres, the private sector and international organisations. Its main objective is to draw up a risk model for each country, thus making it possible to estimate loss potentials and the benefits of loss prevention measures, and ultimately increase insurability. Such an initiative had never existed before, especially for emerging and developing countries.