Small quakes, big impact: lessons learned from Christchurch - Swiss Re
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Small quakes, big impact: lessons learned from Christchurch
Could a small aftershock in a city not considered an earthquake hotspot trigger one of the largest insurance losses ever? Absolutely, because this is exactly what happened when a 6.3 magnitude earthquake hit Christchurch, New Zealand, on 22 February 2011. The massive – and unexpected – insurance costs exposed blind spots in current views of financial earthquake risk. And, in the aftermath of the event, both the claims and rebuilding process proved challenging. Given that a similar sized earthquake can occur virtually anywhere, it is vital that we learn from the Christchurch experience.
Foreword Two noteworthy features of the This publication is a summary of their
Christchurch events – compared to the conclusions and generally seeks to
During 2010 to 2011, the world suffered others – were the high contribution of raise awareness of the possible
a string of serious earthquakes. the insurance industry towards consequences of earthquakes in city
These events were devastating both reconstruction costs and the fact that centres on insurance.
in terms of the number of lives lost and the earthquakes affected a city which
the destruction of property and was not known as a seismic hot spot. I wish you an enlightening read.
infrastructure. I only need mention what
happened in Haiti and Chile or later in These features prompted our experts Matthias Weber, Group Chief
northeastern Japan and in Turkey. to identify reasons why insurers were Underwriting Officer, Swiss Re
During this period, several damaging caught off guard by the scope and
earthquakes also struck Christchurch, complexity of the claims process and
New Zealand. Seismic events caused the spiralling claims costs as well as to
economic losses of over USD 308 billion suggest ways of learning for the future.
in these two years and earthquake- After all, other cities around the world
insured claims for 2011 are likely to could face similar issues, especially if
surpass USD 58 billion, a world record. they are not usually identified as
earthquake hot spots.
A small quake in the wrong place For the insurance sector, the cost from The chart below shows the rise of the
can have a hefty price tag the Christchurch earthquake is currently total insurance loss estimates made by
put at USD 17.2 billion for the February various vendors, brokers and reinsurers
Before 2011, Christchurch was not a 2011 event and close to USD 25 billion over time for the February 2011 event.
place one readily associated with a high for all three events combined (Swiss Re It shows that the current insurance loss
earthquake risk. Unlike the capital Economic Research & Consulting). This estimate of USD 17.2 billion is more than
Wellington, Christchurch does not sit cost far exceeded the initial, model- twice the upper end of the initial loss
near New Zealand‘s main fault lines. It is based forecasts and took the insurance estimates provided by model vendor
located on New Zealand‘s South Island, industry by surprise. Over the last companies, which ranged between
has a population of 380 000 (total 50 years, the only higher earthquake- USD 1.5 and 8 billion. Part of this
country population is 4.2 million) and related insurance losses globally have increase is due to the strengthening of
consists of 99 500 houses, 30 000 flats been those from the 9.0 M event in the New Zealand Dollar (NZD) against
and 38 000 businesses. Japan in 2011 (USD 37.7 billion indexed the USD since February 2011. However,
to 2013) and the 6.7 M event in this only accounts for a 14% increase in
Why then was the impact of a Northridge (California) in 1994 the USD-based insurance loss estimate.
6.3 magnitude (M) earthquake so (USD 22.9 billion indexed to 2013).
devastating? Estimates for the total
economic cost continue to rise. Current
estimates stand at USD 21.5 billion for
the February 2011 event, or USD 31.6 20 Estimated Insured Loss, USD billion
billion if the 7.0 M September 2010 18
and 6.0 M June 2011 earthquakes are
16
also factored in.
14
12
10
8
6
Sources: 4
– AIR news alert, Feb. 23, 2011 2
– EQECAT CatWatch, Feb. 23, 2011 0
– Marsh, Comparing claims from
10.08.2010
26.02.2011
14.09.2011
01.04.2012
18.10.2012
06.05.2013
22.11.2013
10.06.2014
27.12.2014
catastrophic earthquakes, Feb. 2014
– RMS Cat Update, April 5, 2011
– Swiss Re sigma
Publication date
Swiss Re Small quakes, big impact 1
How come initial estimates were Such agents are to a large degree blind Liquefaction
so far out? spots in the current earthquake models,
despite their potential impact on The costs due to liquefaction are
Why did initial estimates, which were earthquake risk assessments. They can substantial and all models by far
based largely on earthquake model consequently act as claims inflators that underestimated the impact of this
outputs, so significantly underestimate significantly increase the ultimate payout. phenomenon in Christchurch – both the
the actual loss? Although New Zealand 2010 and the February 2011 events
has one of the highest levels of And finally, in the case of residential resulted in widespread soil liquefaction.
residential and commercial property claims, the specifics of the insurance Liquefaction risk significantly increases
insurance penetration, the insurance policy wordings and the interactions of reconstruction costs and often causes
sector was taken by surprise in several multiple policies on one claim further total losses to property. It occurs when
areas. impacted the adverse loss development. soil substantially loses strength in
response to earthquake tremors, causing
Firstly, there was the sheer number of it to behave like a liquid. Severe structural
claims: As Christchurch was not Aftershocks damage usually results if liquefaction
considered an earthquake hotspot, occurs underneath a building or a
claims processing procedures were The 22 February 2011 Christchurch highway. Additionally, it also tends to
not set up to deal with the well over earthquake was, from a seismological damage underground infrastructure
400 000 claims across all events with point of view, an aftershock of the earlier such as water and sewage pipes.
multiple claims lodged per property. For earthquake of 4 September 2010.
instance, the Earthquake Commission Although weaker, the aftershock had In the February 2011 Christchurch
of New Zealand (EQC) had to rapidly a far more devastating impact on event, entire neighborhoods were
increase staff from 22 core members Christchurch than the earlier main exposed to liquefaction. Many property
and 27 assessors in reserve before seismological event, mainly because it owners were not only faced with having
the earthquakes, to over 1000 by struck so close to the central business to repair or rebuild their homes, but also
February 2011. On certain days, district. It also created higher losses for with restoring the land itself. Liquefaction
13 000 assessments were handled the insurance industry. Although it was often also results in property flooding
per day by 350 assessors (equating to well known that large earthquakes are because groundwater is squeezed out of
37 claims per assessor per day). As a followed by multiple aftershocks and the soil. Another outcome, especially for
result, detailed assessments were not that this activity often persists for a few large buildings, is a phenomenon called
possible. This left them susceptible for years, the New Zealand events are differential settlement. This is where
challenge at a later point in time which testing the industry‘s assumption about certain parts of a building settle more
prolonged the process and made it the scale of consecutive disasters in the than others during an earthquake, often
more costly. Large numbers of claims same region. resulting in total loss because the
adjustment experts, brought in building structure was compromised.
internationally for a limited time, As aftershock sequences can easily
subsequently handed over claims to trigger second event or stop-loss covers,
different parties. The resulting lack of they are important to consider when
continuity further complicated the assessing earthquake risk. This is
claims process. Claims costs have also especially true for second event covers,
increased because of protracted which only pay out if the policy is
negotiations due to claims advocates affected by two or more loss events.
who worked on a contingency basis. If aftershocks are neglected in the
This tendency is seen in other regions underwriting process, the risk for claims
as well. can be significantly underestimated. The
same is true for stop-loss covers, which
Secondly, so-called secondary loss trigger when the aggregate of all losses
agents contributed significantly to the to a portfolio during the policy contract
overall loss resulting from the February period exceed a certain deductible. For
2011 Christchurch earthquake. These these covers as well, the presence of
included widespread liquefaction, slope aftershocks strongly increases the
instabilities, continued aftershock chance of a payout to the policyholder.
activity and the effect of widespread
damage in the central business district.
2 Swiss Re Small quakes, big impactLiquefaction: not just an issue in
Christchurch
Soil liquefaction is not just an issue in
Christchurch. In fact, many past
earthquakes such as the 1989 Loma
Soil liquefaction can
Prieta earthquake affecting the San
Francisco Bay Area have resulted in
significant property damage due to soil
wreak awful damage
liquefaction. Many, if not most, large
cities around the world would be
exposed to significant liquefaction in the
event of an earthquake near the city
center. The regional liquefaction maps
shown here illustrate this risk for four
sample cities across the world.
(Source: Swiss Re)
Liquefaction potential in Tianjin Liquefaction potential in Jakarta
Liquefaction potential in Vancouver Liquefaction potential in Singapore
Nil Low Moderate High
Swiss Re Small quakes, big impact 3Business interruption Insurance industry preparedness Loss modelling okay?
Business interruption claims from Primary insurers and their staff may This is a crucial observation in the
commercial policyholders increased due themselves be impacted by earthquakes. context of earthquake loss modeling,
to the fact that large portions of the So it is important to have effective crisis as loss models assume that a loss on
Christchurch central business district response and earthquake preparedness a policy does not exceed the sums
(CBD) were cordoned off. Hence, even plans. In Christchurch, staffing was too insured, meaning that the models judge
businesses not directly affected by the lean to handle the sheer number of risks too optimistically. Also, the albeit
impact of the February 2011 earthquake claims and training of claims adjusters sensible requirement of the authorities
were unable to continue operations. That on the job to deal with such an event. that properties be rebuilt according to
said, the large scale demolition of the The lack of adjusters was compounded stricter building codes, e.g. with stronger
CBD did somewhat reduce the business by the fact that Australian adjusters were foundations, meant that claims on only
interruption issue. Furthermore, the still occupied with settling claims from moderately damaged properties could
general impact the earthquake had on the Brisbane floods and Typhoon Yasi. become substantial. This was because
the entire region – with many residents insurance also had to cover the work of
temporarily relocating, key infrastructure strengthening the foundations.
hampered and the worry of subsequent More experts needed
aftershocks – activity in the central
business district was significantly Engineers were also in short supply and Multiple policies
reduced. Additionally, reconstruction facilities were needed for on-site claims
has taken several years to get underway staff. This situation highlighed the Another issue was that many residential
as authorities work to rebuild the city in importance of cooperation within the properties were covered by two policies:
a more resilient way. This has resulted industry to avoid inconsistencies in Firstly, there is the policy issued by the
in business interruption claims often in claims adjustment and to consequently EQC, which covers almost all homes in
excess of the the full limit. process claims more effectively. Under New Zealand.This policy covers up to
such pressure, record-keeping practices NZD 100 000 for building damage and
may suffer. NZD 20 000 for content. Then there
Government involvement are the additional private policies which
were bought to cover the damage not
Despite New Zealand having among Policy conditions covered by the EQC policy. The fact
the highest take-up rate for earthquake that the two policy wordings were not
coverage in the world for both private The high claims costs are partly due to congruent – e.g. the EQC covers land
and commercial insurance covers, the the specific nature of residential building damage while most private policies do
government became very involved due insurance policies in Christchurch. The not – created much debate between the
to the size and impact of the loss. In policies were issued on an uncapped involved insurance companies during
Christchurch the government limited full replacement value basis meaning claims settlements. This ultimately
access to the central business district, that any damaged property is restated delayed the process and again drove up
issued demolition orders, appointed a to an “as new state”. As a result, the the total bill for the insurance business
minister of recovery, strengthened cost of repairing heavily damaged
building codes and designated red zone properties could significantly exceed
areas (where rebuilding is not allowed). the reported value of those buildings.
For claims on commercial policies, costs
While all these actions were designed were higher due to the absence of a
to support citizens and the rebuilding co-insurance clause compounded with
process, they also increased insurance the level of underinsurance. Again this
claim costs. For instance, as mentioned resulted in claims often far exceding
further below, the strengthening of the insured values.
building codes resulted in larger
insurance claims. Also, the increased
number of stakeholders in the settlement
process posed extra challenges for
claims assessors. So open
communication and good relations
with government officials are key. Government intervention
had far-reaching
consequences for insurers
4 Swiss Re Small quakes, big impact“Neighboritis” Lessons learned rebuilding of downtown Christchurch is
far from complete more than four years
Another reason for the rise in claims as There are many lessons to be learned after the earthquakes. Furthermore, as
time went on had to do with so-called from the Christchurch experience, but an industry, we have to take a serious
“neighboritis”. Policyholders who may the most profound one is that a small look at the way earthquake risk is
have accepted a settlement at the magnitude earthquake could hit virtually assessed for city scenarios. Is the
beginning witnessed how some of anywhere and trigger unexpectedly potential for business interruption,
their neighbors who initially rejected large losses. Another basic lesson is that including wide area damage fully
to settle were receiving more generous earthquake models, which are built to understood and taken into account? Are
payouts. This may have prompted predict losses due to well-established there policy wordings that leave liability
them to reconsider and also demand loss patterns, must be updated to uncapped or open to interpretation
higher payouts. ensure accuracy by addressing key with regard to reinstatement values?
model blind spots. These should include If so, is the impact on the claims process
the cascading effect of earthquake properly reflected in the way earthquake
aftershock sequences, the significant models predict financial losses? The
impact of the claims handling process Christchurch experience suggests that
on the ultimate payout, the potentially this is not the case. It is possible that
widespread effect of liquefaction in Christchurch is not an exception but
urban areas, and the paralyzing effect that similar loss developments beyond
that slow reconstruction efforts in a city current risk perceptions could also
center can have. Witness the fact that happen in other cities.
Impact of soil liquefaction beneath a highway
Swiss Re Small quakes, big impact 5Case studies Sydney There are a number of reasons why
Sydney is a city not deemed an Sydney is prone to extremely high
Small earthquakes, such as the earthquake quake hotspot. However, as insurance payouts in the case of a
22 February 2011 event in Christchurch, the 25th anniversary of the Newcastle Christchurch-like earthquake. The city
can strike virtually anywhere. The earthquake reminds us, it is located in a has a higher population density than
consequences to society, the local geographical area that has experienced Christchurch and the economic value
economy and the insurance industry damaging earthquakes in the past. per square meter can be as much as
could be as severe as in Christchurch. Approximately 120 kms from the five times higher. The risk of building
What can other cities around the world Sydney central business district, damage is higher in Sydney than
learn from the Christchurch event, Newcastle was hit by a 5.6 magnitude Christchurch as many of Sydney‘s older
including those which are typically not earthquake in 1989. According to the buildings have unreinforced masonry
on the radar of earthquake risk studies? Australian Insurance Council at the time, walls. The latter is a type of construction
We have selected three cities to serve this triggered an insurance loss of that most of the over 35 500 buildings
as templates for many others around the AUD 862 million (USD 805 million) damaged in Newcastle had.
world to illustrate how a Christchurch- despite its small magnitude. It should be
like earthquake would impact other borne in mind that if it happened today, Like Christchurch, the majority of Sydney
locations. Needless to say, each city is insurance costs would be in the range property owners (an estimated 80% of
unique. However, the effects which of AUD 4.3 billion (Risk Frontiers, residential property and 90% of
resulted in very high insurance payouts Australian and New Zealand Institute of commercial property) buy earthquake
in Christchurch, could also play out in Insurance and Finance Journal in 2007) insurance written on a full replacement
other cities such as Sydney or Singapore. to AUD 6.2 billion (AIR, Flyer on value basis, albeit in most cases with a
Earthquake Model for Australia in 2012) policy limit. Challenges in the claims
The likelihood is low that a magnitude or USD 3.8 to 5.4 billion. process and the ensuing delays and
6.3 earthquake would occur beneath inflation of cost would almost be
any of the cities listed below. If such costs could arise from an inevitable. This would be due to the
Nonetheless, as the Christchurch earthquake in Newcastle, what would sheer number of claims and also to the
event showed, because such an be the impact of a small earthquake in policy wordings which are similar in
earthquake can happen even in places the much larger and more built-up city many ways to those in Christchurch. In
not considered a high seismic risk, it is of Sydney? It should be noted that the addition, claims handlers in Sydney are
worthwhile considering the associated likelihood of such an event is low with a not experienced in settling earthquake
loss scenarios. return period of several thousand years. claims. Such lack of knowledge would
That said, a Christchurch-like event pose additional challenges. A further
could result in total damages of complicating factor could be the
USD 120 billion (Swiss Re estimate), increasing practice of offshoring claims
even without accounting for the effect adjustment, meaning that the claims
of potential aftershocks. The bulk of this handlers are often unaware of local
loss would be covered by insurance. practices. The only Christchurch factor
which Sydney would likely be spared
is soil liquefaction. With only few
exceptions, such as certain areas around
Botany Bay, Sydney is largely built on
strong sub soil and is expected to have
little to fear from soil liquefaction.
Only Christchurch factor
Sydney would be spared is
soil liquefaction
6 Swiss Re Small quakes, big impactSingapore Vancouver Vancouver has several areas which are
The probability of the Singapore area We chose Vancouver as the final case prone to widespread liquefaction as the
being directly exposed to a devastating study to highlight that Christchurch-like liquefaction map shows. The areas
earthquake is low. However, a number of effects are also relevant for cities outside around the Fraser River, especially in
relatively close tectonic features such as of the Asia-Pacific region. Vancouver has Richmond, Delta and around Vancouver
the Sumatra Subduction zone and the not experienced a substantial earthquake International Airport are located on
Sumatra Fault could create losses in in recorded history. However, Vancouver liquefiable soils. The impact of wide-area
Singapore if they generated substantial is located close to the so called Cascadia damage and business interruption on
events in proximity to Singapore. subduction zone, which runs along the the economy in Vancouver would likely
Earthquakes on these tectonic features US-Canadian coast roughly 75 km off be substantial as well. This is accentuated
have been repeatedly felt in Singapore the coast of Vancouver Island and by the reliance of the transport network
(e.g. M 7.2 in 1909 at a distance of 300 km from the Vancouver City Centre. on the numerous bridges crossing the
470 km, M 7.5 in 1914 at a distance of Paleoseismic studies indicate that the Fraser River. Many of the bridges are
650 km, M 7.1 in 1971 at a distance of Cascadia subduction zone has located on poor subsoil and would likely
550 km among others). Distant but large generated very large earthquakes on have to be closed for some time
earthquakes produce “slow shaking” average every 500 years. The last event following an earthquake.
that travels relatively large distances and happened roughly 300 years ago.
can impact tall buildings in Singapore. The earthquake insurance take-up rate in
Compared to Christchurch, the Vancouver is smaller than in Christchurch,
As in Christchurch, many parts of population density and economic value so insurance would only be liable for a
Singapore, such as Changi airport or per square meter are significantly fraction of the economic damage.
Jurong petrochemical complex, are higher in Vancouver, especially in the Nonetheless, due to the larger value
located on potentially liquefiable soils. downtown area. By simply comparing accumulation, the insurance loss would
At close to 100%, the earthquake Vancouver’s economic exposure in the be on a similar scale to the Christchurch
insurance take-up rate is also very high downtown area to that of Christchurch, loss. The burden on claims adjustors,
and insurance would carry the bulk of it is clear that should a Christchurch-like most not being experienced in settling
the financial burden, except for the M 6.3 earthquake happen beneath earthquake claims, would be significant.
impact on infrastructure. Being a Vancouver, it would result in substantially Like in Christchurch, residential policies
relatively aseismic country, Singapore‘s larger economic losses estimated at are issued on a full replacement value
building codes are less focused on USD 40 billion (Swiss Re estimate). basis and are often uncapped, which
earthquake resilience, although some For a large earthquake on the Cascadia would make these policies prone to
seismic code provisions exist for tall new subduction zone, the total economic loss inflated claims. Therefore, delays and
buildings, which are built on weak soil. is estimated by an AIR study in 2013 complications in the claims process, as
At the same time, many of the newer at CAD 75 billion (USD 66 billion) with experienced in Christchurch, would
buildings are characterised by special an insurance loss of CAD 20 billion likely also occur.
architectural features, which introduce (USD 18 billion). This estimate is higher
irregularities in the buildings‘ shapes. since such an earthquake would create Another complicating factor in
While architecturally interesting, such more widespread damage in the larger Vancouver are the so called “loss
buildings are inherently weaker in Vancouver area and would also include assessment covers”, which are sold to
earthquakes than simpler and more Victoria on Vancouver Island. condominium owners. The loss
conventional shapes. assessment covers are intended to pay
for the part of the building damage
Singapore therefore is exposed to the which is not covered by the
same factors which contributed to a condominium association’s building
large insurance loss in Christchurch. insurance, or which falls within the
These include the potential for deductible of that cover. With the
liquefaction in many newly-built up substantial deductibles on the building
areas, a very high earthquake insurance insurance sold to the condominium
take-up rate, and an insurance industry associations, the loss assessment covers
that is relatively unaware of these risks. are susceptible to substantial payouts.
Additionally, Singapore‘s older buildings However, this loss assessment cover
were not built with earthquake safety as exposure is often not systematically
a primary objective. And, as in Sydney, tracked and the corresponding claims
Singapore has a much higher economic might offer a further surprise.
value per square meter than
Christchurch. Consequently, an
earthquake similar in magnitude and
area affected might trigger a total
economic loss of USD 65 billion (Swiss
Re estimate).Insurance would be liable
for a large portion of this economic loss.
Swiss Re Small quakes, big impact 7Conclusion Furthermore, we recommend that
insurers conduct “what-if” scenarios
As the Christchurch events and the case based on the Christchurch experience.
studies of Sydney, Singapore and These exercises need to address
Vancouver highlight, the impact of a questions such as: Do the policy
Christchurch-like earthquake on a city wordings offer the necessary clarity?
center can be immense. There are many What potential exposures could be
such cities around the world which are covered which are not currently taken
not usually associated with high into account? Would sufficient claims
earthquake risk. But when such an event adjusters be available? Is a process in
does occur, losses can nonetheless be place to deploy and coordinate claims
substantial. The consequences seen in adjusters? How will the settlement of
Christchurch are most probably the claims work? Could damage to key
norm as opposed to the exception. It is infrastructure hamper reconstruction
true that the probability of a efforts? During the process of
Christchurch-type event in any specific reconstruction how will the
city is very low. Nevertheless, there is a communication and coordination
substantial probability that one or other between insurers, authorities, and the
city somewhere in the world will be public be handled ? Addressing these
affected in the coming years and will questions will help us benefit from the
show similar claims-inflating effects. costly lessons from the Christchurch
experience.
Relying on potentially outdated models
which may not fully reflect the factors
described in this publication, could
potentially lead to the situation where
the insurance industry is not taking the
risk of potential earthquakes in city
centres fully into account. We have
focused on three cities as examples.
However, many other cities around the
globe meet similar criteria and would be
equally prone to devastating earthquake
damage.
Seismic risk in city
centres underestimated
by insurance industry
8 Swiss Re Small quakes, big impact© 2014 Swiss Re. All rights reserved. Title: Small quakes, big impact: lessons learned from Christchurch Author: Balz Grollimund Editing and realisation: Sarah Davies De Paola, Richard Heard Managing Editor: Urs Leimbacher Graphic design and production: Swiss Re Corporate Real Estate & Logistics/ Media Production, Zürich Photographs: Getty Images The front cover image shows the devastation caused by the 2011 Christchurch earthquake and the subsequent rebuilding process. The content of this brochure is subject to copyright with all rights reserved. The information may be used for private or internal purposes, provided that any copyright or other proprietary notices are not removed. Electronic re-use of the content of this brochure is prohibited. Reproduction in whole or in part or use for any public purpose is only permitted with the prior written approval of Swiss Re, and if the source reference is indicated. Courtesy copies are appreciated. The information provided and forward-looking statements made are for informational purposes only. They do not constitute any recommendation, advice, solicitation, offer or commitment to effect any transaction or to conclude any legal act of any kind whatsoever. Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this brochure is expressly excluded and readers are cautioned not to place undue reliance on forward-looking statements. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this brochure. Visit www.swissre.com to download or to order additional copies of Swiss Re publications. Order no: 1505985_14_en 11/14, 300 en
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