2010 - A year of earthquakes
The earthquakes in Chile, New Zealand and Haiti confronted the insurance industry with a variety of challenges due to the different standards of development in the countries concerned. The efficiency and scale of settlement depended to a large extent on each country's insurance density and legislative framework.
While most people expected a lively hurricane season in the North Atlantic in 2010, exceptionally high losses were incurred instead on a completely different front, as several major earthquakes caused extensive damage. The most devastating earthquake of the year with more than 220,000 deaths struck Haiti, a country that was in no way prepared for such an event. Chile and New Zealand, on the other hand, were very well prepared. From the underwriting perspective also, countries with such disparate development levels must be assessed differently:
Chile: Settlement hampered by supervisory requirements
About 200,000 individual claims were reported to insurers in both New Zealand and Chile. Settling such a large number of claims presented a major challenge for local markets. After a slow start, more than 90% of the Chilean claims had been settled seven months after the quake. The supervisory requirement that each survey must be signed by a locally registered loss adjuster proved to be an obstacle. As a result, foreign surveyors were unable to relieve the burden on local loss adjusters to the full extent. As usual in the case of major losses, settling the claims reported for damaged industrial plants will be a lengthy process. Some production facilities are still not working at full capacity, leaving the business interruption (BI) component of the claim unresolved. In some cases, the wording of the policies was not sufficiently clear. This applies not only with regard to insurance of the full or residual value in the case of mortgage protection covers, but also with regard to deductibles in BI insurance in the industrial sector.
New Zealand: Public-private partnership creates high insurance penetration
In New Zealand, problems were encountered when activating the Catastrophe Response Programme of the state Earthquake Commission (EQC). The interaction between the EQC cover on a first-loss basis and the private-sector cover for the value of a building above and beyond this level was similarly fraught. Moreover, widespread soil liquefaction presented a very special challenge, for the EQC also covers the value of the land. Despite this, however, both Chile and New Zealand prove that the insurance industry is in a position to make a substantial contribution towards financing the losses from major catastrophes. In New Zealand, the existence of the government-owned EQC with reinsurance in the global market has resulted in high insurance penetration. In Chile, there is more far-reaching potential for insurance of residential buildings, as well as of public infrastructure.
Haiti: Market in need of development
The situation in Haiti is different, the under-developed insurance sector reflecting the precarious condition of society in general. Insured losses account for only a marginal share of the overall loss and were confined almost exclusively to the local facilities of foreign enterprises. Here, state covers, such as those provided by the Caribbean Catastrophe Reinsurance Facility (CCRIF), offer a way for the insurance industry to make an effective contribution. Microinsurances for lower-income groups are another conceivable possibility. Both approaches, however, are virtually unviable without subsidisation by the international community, e.g. through development banks. The task of reconstruction alone presents an immense challenge for the financially weak state. CCRIF is a first step, but its volume is nowhere near enough to provide the help genuinely needed by a country like Haiti.
Greater account to be taken of post-loss amplification in future
The large number of insured individual losses in Chile and New Zealand shows that the phenomenon known as “post-loss amplification” must be taken into account when assessing the risk in such markets. The term refers to bloated claims payments due either to higher repair costs resulting from a shortage of material and labour or to the fact that mass claims are settled on a blanket basis. For a quake of this magnitude, the proportion of policies affected in Christchurch was unusually high. Individual large claims by industrial plants with a high BI component pose a problem which has yet to be adequately solved when assessing and modelling risks. As was already experienced after other major catastrophes, such as the 1985 earthquake in Mexico or Hurricane Katrina in 2005, such cases contributed significantly to the insured market loss in Chile.