One year after the Chilean earthquake
On February 27, 2010, a magnitude 8.8 earthquake occurred off the coast of the central Maulé region of Chile.
In the capital of Santiago, the earthquake was felt at Mercalli intensity scale VII (Destructive). Tremors were felt throughout neigbouring Argentina and north into Peru. The quake triggered a tsunami which devastated a number of coastal towns and raised tsunami warnings in 53 counties. The tsunami damaged parts of San Diego, California and even Tohoku, Japan where its damage to the fishing industry was estimated to cost over USD $66 million.
One year after the significant quake, reinsurance intermediary Aon Benfield has launched its new report ‘Chile: One Year On’ (PDF) which highlights how the earthquake tested the reinsurance market and outlines steps for insurers to prepare for future catastrophes.
Aon Benfield says the Maulé earthquake demonstrated how the re/insurance system worked effectively and particularly benefited the country’s infrastructure by providing a means for recovery that otherwise would have fallen on the state. Other key findings from the report include:
- Some 95% of the USD8.5bn loss fell to reinsurers. For a comparable US event only 50% would be ceded. The facultative market paid 60% of this figure.
- Chilean excess of loss reinsurance programs initially renewed with increases of 75% or more, but recent increases have now stabilized at around 50%.
- Over 95% of personal lines and 80% of commercial lines claims have been paid and closed. The regulator set a deadline of 30 April 2010 for policyholders to file claims so most were filed two months after the event. This proved to be a very positive step for the insurance industry, particularly in contrast to very drawn out claim settlement process from the Northridge earthquake.
- The size of the Chilean tsunami was small relative to the large magnitude earthquake, particularly in comparison to the 1960 earthquake which produced damage and deaths as far away as Hawaii and Japan.
A strong regulatory system aimed at protecting consumers – coupled with a robust seismic code – can enable countries globally to mitigate damage and economic loss.
Aon Benfield says the key next steps for the industry to prepare for future catastrophic events are:
- Tsunami research. As a non-modeled peril, insurers need to consider potential tsunami damage in addition to output from catastrophe models’ earthquake analysis.
- Reducing the gap between estimate and actual losses: Modeling firms must work to understand the drivers of model miss. Improving tools to reduce the gap between estimated and actual losses will build insurers’ confidence in using models as a risk assessment tool.
- Higher quality data: Improving the quality of exposure data will in turn improve the accuracy of the model results.
Paul Felfle, head of Aon Benfield Analytics for Latin America, said: “The Maulé earthquake was the second largest insured earthquake loss after the Northridge event in 1994. It served as a test of the Chilean insurance market, throwing into the spotlight its contingency plans, the regulatory framework, construction codes and ultimately the effectiveness of the reinsurance market. Overall, the system designed to protect the public and insurance companies proved highly effective.”
Stephen Mildenhall, head of Aon Benfield Analytics, added: “From a reinsurance perspective, insurance companies were able to see that their cover not only provided an accretive form of capital, but that, based on current estimated losses, they had purchased sufficient limits to protect their balance sheets and meet their obligations to the insureds of Chile. The lessons learned in Chile can be utilized to prepare for future events both in Chile and in other countries with similar loss potential from natural hazards.”
