Insurance against earthquake risks — recent developments and future challenges

28 May 2020 — XPRIMM
klime-20200528Author: Klime Poposki, University St. Kliment Ohridski, Faculty of Tourism and Organizational Sciences, Ohrid, Macedonia

Earthquakes are one of the most destructive natural perils and can lead to severe economic, social and environmental impacts. Since 1990, more than 800,000 people have lost their lives as a consequence of earthquakes, which have caused an average of USD 34.5 billion in damages annually. Rapid urbanization, the accumulation of assets in seismic areas has led to an increasing amount of exposure to earthquake risk in many parts of the world.

Insurance can make an important contribution to managing the financial impacts of earthquake risk, although the insurability of earthquake losses faces a number of challenges. The aim of this paper is to gives an overview of current insurance systems for earthquake risk that exists. An emphasis will be given to the role of insurance in mitigating financial consequences of catastrophic earthquakes as integrated part of disaster risk reduction. In particular, challenges related to low-probability high-consequence risk characteristics will be discussed. Various insurance and reinsurance models that have been developed and applied in different academic fields will be described.

This paper addresses the protection gap for extreme events by focusing on natural catastrophe ('nat cat') perils, and specifically by analyzing the property insurance market. The 'protection gap' is defined as the uninsured portion of losses resulting from an event, namely the difference between total economic and insured losses. The term 'underinsurance', on the other hand, may be defined as the difference between the amount of insurance that is economically beneficial - which may include some rationally chosen self-insurance - and the amount purchased.

A key contribution of this paper is identifying the specific challenges for increasing the availability and take-up of earthquake insurance, including the significant potential for severe, correlated losses from earthquake, the challenges in quantifying earthquake exposure and the limited willingness-to-pay for insurance coverage among households and businesses. It provides an overview of measures that can be implemented to reduce the size of expected losses and facilitate the purchase of insurance coverage.

The paper proceeds as follows. Section 2 provides an introduction to the nature of earthquake risk and an overview of trends in the occurrence of earthquakes and their economic impacts as well as the role of insurance in managing earthquake risk. The next two chapters provide an overview of insurance coverage available for earthquake risk in different countries. It describes public (re)insurance schemes that have been established to provide coverage for earthquake (and sometimes other natural peril) risks, as well as coverage available from private insurance companies. Next section outlines the significant level of underinsurance for earthquake risk and some of the main causes of underinsurance. The last section provides an overview of measures that can be implemented to reduce the size of expected losses and facilitate the purchase of insurance coverage.

The article was prepared for the insurance bulletin Bilten, published by the Croatian Insurance Bureau. Besides the current English version, a Croatian version will be soon available for the Bilten readers.

Contact the author:

Klime Poposki

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