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Japan, New Zealand earthquakes hold two new lessons for insurers


April 8, 2011   by Canadian Underwriter


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Catastrophic earthquakes in New Zealand and Japan in 2011 Q1 have two new lessons for insurance companies, according to Institute for Catastrophic Loss Reduction (ICLR) executive director Paul Kovacs, who spoke at the ICLR’s annual general meeting in Toronto on Apr. 8.
One is that surprises can happen.
“The science community predicted the strength and location of the earthquakes in Haiti and Chile, but was not able to forecast when the earthquake[s] would strike,” Kovacs said. In comparison, Kovacs noted seismologists in New Zealand were surprised by the location of the Magnitude 6.3 earthquake that hit Christchurch on Feb. 22, since the area was not on a known fault line.
And in Japan, Kovacs noted: “Seismologists were very aggressively saying: ‘The worst I can imagine for this location is an 8.2 earthquake,’ and we had a 9.0 earthquake [on Mar. 11, 2011], which is much worse than an 8.2 earthquake.
“So one of the new lessons from New Zealand and Japan is that, despite advancements happening in seismology and the science, there are surprises.
“Decision makers need to use the science, but they need to use it carefully and understand that there are limits and find the right way to take the scientific knowledge and build it into their decision making process…”
The second lesson involves the role of insurance in earthquake events. The role of insurance differs around the world, Kovacs noted, with the Canadian model following along the lines of the U.S. model.
In Canada, coverage for damage due to earthquakes is not bundled together. For example, a basic policy might cover a fire following an earthquake, a separate earthquake endorsement might cover shake damage and overland flood insurance – if it existed in Canada, which it does not – might cover tsunami damage.
In contrast, governments in some countries around the world – Japan and New Zealand are two of them – have a very clear agreement with their domestic insurance industry related to the solvency of the insurance industry, Kovacs noted.
For example, in these countries, the role of the insurance industry in rebuilding after an earthquake is clearly understood by the parties, and the limits of this role are identified and understood.
“So a cap [on insurance payouts] was in place when the earthquake happened [in Christchurch and Japan],” Kovacs said. Domestic insurers “knew what their costs were going to be, they knew it wasn’t going to be greater than that, and there was no discussion about insolvent insurance companies in Japan or New Zealand, because all of that had been worked out in advance.
“Companies had caps and limits and a variety of things to make sure that solvency wasn’t an issue in those countries.”
The flip side of this debate is a discussion about whether policyholders are aware and understand the impact of these caps and limits, in addition to the rationale for them.
For earthquake coverage in New Zealand, Kovacs noted, “people pay $50, they get coverage off up to $100,000 worth of damage to their home and another $20,000 to the contents of their home, with essentially no deductible.
“So almost everybody in Christchurch got a payment from their insurance company, but with a cap. So many, many people were serviced, all the funding was in place and there were no solvency issues.
“In Japan, if you have earthquake insurance, you are covered for shake, for fire, for tsunami, for whatever. If there’s an earthquake, you’re covered.”


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