Catastrophe Firms Analyze, Estimate Losses from Chilean Quake

Catastrophe modeling firms Air Worldwide, Risk Management Solutions and EQECAT have all released preliminary analysis and estimates of the economic and the insured losses from the devastating 8.8 magnitude earthquake that struck Chile over the weekend [See IJ web site – https://www.insurancejournal.com/news/international/2010/03/01/107734.htm ].

AIR estimated that insured losses would likely exceed $2 billion, while economic losses could be more than $15 billion. RMS gave no monetary figures, but indicated that both insured and economic losses would be substantial, based on its analysis of the Chilean market. EQECAT estimated that insured losses would be in the “range of $3 billion to $8 billion, or 25 percent of the total economic losses.” The firm’s estimate on those remains at between $15 and $30 billion. The insured loss is between 15 and 40 percent of the estimated insured limits for earthquake coverage, EQECAT added.

“The total economic loss will likely be severe from damage not only to buildings, but from the widespread impact on infrastructure, including roads, bridges, airports, and utilities and telecommunications networks,” explained Dr. Jayanta Guin, senior vice president of research and modeling at AIR Worldwide.

AIR’s figures indicated that the area “from Concepción to Santiago impacted by the quake contains residential and commercial properties with an insurable value of about $275 billion (CLP 144,375 billion). Of this total, approximately 70 percent is in the Santiago area and approximately 5 percent in Concepción. However, of the damage incurred to these properties, only a portion is expected to be insured. Residential insurance penetration (the percentage of properties that are insured for earthquake) are believed to be as low as 10 percent, while commercial insurance penetration rates are likely significantly higher, at about 60 percent.”

Dr. Claire Souch, vice president at RMS, noted: “One positive outcome of Chile’s history of powerful earthquakes is that building standards are some of the most stringent globally and are generally much higher than in the rest of South America. Close to half of all the properties in Chile have been built in the past 40 years when building codes have been in force. Most residential buildings are made of reinforced concrete, which acts as a buffer against ground shaking, which is in sharp contrast to the shanty housing that was destroyed by the Haiti earthquake.”

She also pointed out that reports on Monday, March 1, indicated that “at least 700 people have been killed, although this estimate is expected to continue to rise over the coming days. Up to 1.5 million homes in total are thought to have been damaged; of the buildings that have fully collapsed, many are of older design and include numerous historic structures, as would be expected.”

EQECAT stressed that its “initial estimate of insured loss is not yet informed by on-the-ground data or a geographic distribution of insured values at risks, and therefore the range is correspondingly wide. In addition, a large degree of uncertainty in the insured loss estimate stems from the extent of infrastructure damage. The speed of restoration of the transportation and utility networks can significantly impact Business Interruption losses.”

AIR’s Dr. Guin noted that “cities closer to the epicenter have been hardest hit. Exacerbating matters, construction here is generally older and more brittle. The towns of Talca and Curicó, which were closest to the epicenter, have suffered major damage and there are reports that much of Curicó, in which adobe construction still dominates, has been leveled; however, such buildings are unlikely to have been insured. Significant damage has also been reported in Chile’s second largest city, Concepción, an industrial city some 115 km south of the epicenter.”

AIR also explained that its insured loss estimates reflect:
— Insured physical damage to property (residential, commercial/ industrial, auto), both structures and their contents;
— Business interruption losses
— Demand surge—the increase in costs of materials, services, and labor due to increased demand following a catastrophic event

However, AIR pointed out that they do not reflect:
— Losses to uninsured properties;
— Losses to infrastructure;
— Losses from non-modeled losses, including loss adjustment expenses, fire-following, tsunami and landslide.

RMS’ Dr. Souch noted that earthquake coverage is widespread in Chile, with ninety percent of property insurance policies carrying earthquake cover. “Given the recent history of earthquakes, insurance penetration in Chile is relatively high at around 3.5 per cent of GDP. To put this in context, coverage there is higher than in Mexico, although still lower than the US.”

She added that a “lack of power and damage to infrastructure is likely to increase demand for materials and labor and escalate insured losses. As previous events have shown, this could be in the order of 30 per cent.”

Dr. Souch also pointed out that some of the largest losses are expected to be from large industrial facilities. “Copper mining is Chile’s largest export activity and production was interrupted by power shortages, but there has been no structural damage to the facilities reported so far. Oil refineries seem to be the most affected. Aconcagua oil refinery located close to Santiago, has currently halted operations and may be fixed within six days. Bio Bio oil refinery, located in a coastal location close to the Concepcion has the largest output in the country and is in the epicentral area. Though the extent of damage to this facility is not known, statements from the government indicate that the repairs to this facility are expected to take longer than at Aconcagua.”

Sources: Air Worldwide – www.air-worldwide.com; Risk Management Solutions – www.rms.com and EQECAT – www.eqecat.com