FROM HAITI TO JAPAN
Fourteen Months of Major Earthquakes and What
They Mean to the Global Insurance Industry
May, 2011
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FROM HAITI TO JAPAN
Fourteen Months of Major Earthquakes and What
They Mean to the Global Insurance Industry
In any given year, there are scores of earthquakes, most barely significant enough to rattle a
teacup. But since January 2010, the globe has been rocked by eight quakes of magnitude
6.1 or greater, one of which was 9.0. Two resulted in enormous loss of life and many caused
significant property damage.
In this special report, we examine this phenomenon and its impact on the global insurance
industry, as well as on disaster modeling. We will also look at how U.S. earthquake insurance
coverage may be re-evaluated, particularly in the wake of the devastating March 11, 2011
earthquake in the Tohoku region of Japan.
From Haiti to Japan
On January 12, 2010, Haiti was rocked by an earthquake that measured 7.0. According to
the U.S. Geological Survey1, 222,570 people were killed and another 300,000 were injured.
Property damage was vast, with 97,294 houses destroyed and 188,383 damaged.
That was the first of a string of quakes in 2010. It was followed by a magnitude 8.8 quake
south of Santiago, Chile on February 27 that had perhaps as many as 130 aftershocks in its
wake, 13 of which had a magnitude greater than 6.0. New Zealand was struck by a 7.1-magnitude quake in a sparsely populated area of its countryside in the fall. But it was not as
fortunate on February 21, 2011, when Christchurch, the largest city on its south island, was
rocked by a magnitude 6.3 event. More than 160 people died and perhaps as much as a
third of the buildings in its central business district were so damaged that they will have to
be demolished.
Though damaging, the two New Zealand quakes were, however, a fraction of the destructive
power of the magnitude 9.0 quake and tsunami that leveled northeastern Japan on March
11, 2011 and which continues to jolt seismic monitors and world financial markets.
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From Haiti to Japan
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May, 2011
15 Months Of Quakes
Major quakes by location and magnitude
DateLocation
Magnitude
01/12/10
Port-au-Prince, Haiti
7
02/27/10
Pellehue/Maule, Chile
8.8
03/08/10
Başyurt, Turkey
6.1
03/11/10
Pichilemu, Chile
6.9
04/14/10
Yushu, China
6.9
09/04/10
Canterbury, New Zealand
7.1
02/22/11
Christchurch, New Zealand
6.3
03/11/11
Tohoku, Japan
9
The Ring of Fire
Since earthquakes
What is going on here? Are quakes increasing in frequency and power? Are there underlying
began to be widely
environmental or geological issues that are throwing the earth off kilter?
tracked in the
The answer, for the most part, is No. Since earthquakes began to be widely tracked in the
1930s, the number
1930s, the number of major quakes that have occurred each year has been fairly stable2.
of major quakes
that have occurred
The U.S. Geological Survey says the annual pattern has been about 18 major earthquakes—
those of a magnitude between 7.0 and 7.9—with one quake above 8.0. The areas of high
seismic activity have remained constant too, with the so-called Ring of Fire zone, which hugs
each year has been
the nations bordering the Pacific Ocean from Australia all the way around to Argentina, be-
fairly stable
ing far more active than geologically stable regions, such as northern Europe or the eastern
seaboard of the United States. Magnitude 9.0 quakes, like the one that hit the Tohoku region
of Japan, remain rare. There have been just six others since 1952 worldwide.
We are, however, much more aware of every quake that occurs. Advances in earthquake monitoring technology now mean that scientists are able to record many more quakes every year:
The USGS’s National Earthquake Information Center listed 47 around the world on March
19, 2011 alone, ranging in magnitude from 3.0 to 5.9. The general public knows about more
quakes as well, thanks to the spread of the Internet and global telecommunications. News of
the Tohoku quake was around the globe within minutes of the initial shock.
But two other factors make earthquakes seem larger in the public consciousness: The increase in Earth’s population and the infrastructure needed to support that population. There
are more people and more insurable infrastructure in the path of every possible fault line.
Consider that, in 1930, the population of Tokyo was just 5.4 million; by 2009, the city had
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grown to roughly 13 million inhabitants3, a population that lives and works in large buildings
and relies on a extensive network of utilities and supplies to lead their daily lives.
The Damage Toll
Estimates of the total
And so the toll from modern quakes can be staggering. According to Eqecat4, a California-
insured loss from the
based company that provides catastrophe risk modeling and consulting, the earthquakes of
Tohoku event range
from $21 billion to as
much as $39 billion
2010 killed more than 225,000 people and resulted in insured losses of more than $10
billion and economic losses of $40 billion.
The Tohoku quake and the accompanying tsunami killed 15,093 people and more than
9,000 were, as of mid-May, still reported as missing5. They also destroyed or damaged thousands of residential, commercial and factory buildings, disrupted transportation and caused
a nuclear power plant accident as serious as Chernobyl6. Estimates of the total insured loss
from the Tohoku event range from $21 billion to as much as $39 billion.7 Towers Watson has
estimated the financial loss to be in the range of $300 billion , triple the damage of Japan’s
last major earthquake, the magnitude 6.5 quake in Kobe in 19958. In April, the Bank of
Japan downgraded its economic growth forecast for fiscal 2011 to 0.6% from 1.6%9.
Even when quakes occurred in highly populated regions, their impact can vary greatly. Less
stringent building codes and a lack of adherence to those codes appears to have led to a
high death toll in Haiti. While the February 27, 2010 quake in Chile was the fifth largest in
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that country since 1900, the human toll was far smaller because inland buildings remained
structurally sound, as did dams and levees. Waterfront areas, however, suffered from liquefaction, where the saturated soil loses its strength under an earthquake’s shaking. According
to a report sponsored by the U.S. National Science Foundation10, liquefaction compromised
structures at Chile’s key port facilities, as well as bridges, railroads and road embankments.
There was also significant damage to Chile’s primary north-south highway.
And even before the
Tsunamis were also a factor in the Pellehue/Maule quake death toll, though not to the extent
Christchurch and
of the Tohoku quake, where water overcame sea walls and reached levels of 124 feet11. The
Tohoku quakes this
year, the world’s
seismic activity was
reverberating through
Japanese tsunami was felt as far away as northern California, where it destroyed the harbor
at Crescent City. The damage to America’s West Coast would likely have been far worse had
the tsunami hit at high tide instead.12
The damage done by all these quakes has most certainly rattled the world of insurers and
reinsurers too. Many of these companies have warned of losses in coming results, and ana-
the catastrophe bonds
lysts at Keefe, Bruyette & Woods recently stated that the first three months of this year “will
market
go down in the record books as among the worst in global underwriting history.”13 Yet, the
toll from the Japan quake on the insurance industry may still not be as large as it could have
been because less than 20% of Japanese consumers have earthquake insurance and nuclear
reactors are covered by a global government insurance pool. Japanese insurers and the Japanese government will have the responsibility of paying for home and health insurance claims,
while many of the business claims will fall to international insurers. RMS, a catastrophe
modeling company, has estimated business claims at perhaps as much as $9 billion. 14 U.S.
insurers will face far less exposure than they did with Hurricane Katrina, which did $81 billion in property damage.
And even before the Christchurch and Tohoku quakes this year, the world’s seismic activity
was reverberating through the catastrophe bonds market. Munich Re reported in January
2011 that $5 billion in catastrophe bonds were issued in 2010 and that new issues in 2011
could reach as much as $6 billion. The company said that the current low interest-rate environment will continue to make catastrophe bonds attractive to major institutional investors
including pension funds. It noted that major traditional investors now account for more than
20% of the catastrophe bond market, up from 5% as recently as 2009.15
No Room for Complacency
U.S. insurers may have other reasons to be wary of earthquakes, however. Paul Thenhaus, a
geologist at Eqecat, says that scientists had not expected a 9.0 quake in the Tohoku region
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because quakes of that magnitude typically happen where the breaks in the earth’s crust are
newer. “Magnitude 9 quakes are expected in Chile,” says Thenhaus. “We saw one in Chile
in 1960”. The May 22, 1960 quake at Valdivia is, at 9.5, the most powerful earthquake
ever recorded. The reason is that the country borders on a much younger tectonic plate, the
Nazca plate, which makes it a zone that seismologists call “warm”. “The Maule earthquake
wasn’t much of a surprise,” says Thenhaus, referring to the strength of the February 27,
2010 event.
Seismologists also must puzzle over the way in which the Tohoku quake happened. They had
expected the plates in the Honshu area to rupture in limited, independent segments, as had
been the pattern in the past. But this time, Thenhaus says, the rupture cascaded through all
the faults, ultimately encompassing a zone as large as Indiana.
Of particular concern
“Nobody had anticipated that all the faults would cascade together,” he says. “Now we know
is the Cascadia Sub-
that it can happen, we have to rethink things. There will be a reevaluation, particularly in the
duction Zone, a fault
circum-Pacific regions.”
that extends from
Of particular concern is the Cascadia Subduction Zone, a fault that extends from Vancouver
Vancouver Island to
Island to northern California that is thought to be most at risk for a Tohoku-size quake. More
northern California
than 15 million people now live along the fault, and a rupture, particularly if it is accompanied by a tsunami, would cause significant damage to Vancouver, Seattle, Portland and the
that is thought to
San Francisco Bay area. Seismologists are also reevaluating the New Madrid fault, a zone
be most at risk for a
under the Mississippi where the borders of Missouri, Illinois, Kentucky and Tenessee come
Tohoku-size quake
together. It was the site of one of the four largest earthquakes in north America in 1811.
But Thenhaus cautions that this is going to be very painstaking research that could take more
than a decade to complete. Seismologists must review reams of data from an ever-expanding
network of monitoring stations and consider the historical records of earthquake occurences
to reexamine their thoughts about frequency.
“We can’t go around saying there will be magnitude 9 earthquakes all over the place,” he
says, adding that even if some seismologists believe strongly in the possibility there will likely
be opposing views. “It will take time for a new consensus to develop,” he adds.
Thenhaus notes for example that, in recent years, paleo-seismologists working in Japan believed they had evidence of an earthquake-generated tsunami that occurred in the Tohoku/
Sendai region in the year 869 that might have been as large as the one that occurred in
March 2011. But the organization in Japan that produces the seismic hazard maps judged
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May, 2011
the information too speculative to include. Risk modeling companies base their guidance in
large part on these kind of hazard maps and they usually agree to a large extent; had one
opined that a magnitude 9.0 quake was possible in northeastern Japan, the assessment
might likely have been dismissed as unfounded.
Waiting, Watching, Planning
The lesson to be drawn
That does not mean that U.S. Insurers will be laying low until the new assessments are com-
from the globe’s massive
pleted. Even though the last major quake on the New Madrid fault was 1895 and the last
quakes is clear. What
happened in Japan,
event on the Cascadia fault was well before the Pacific Northwest became the major business
and technology hub that it has become today—1700, to be exact—insurers are working to
get a new perspective on their policies. They have come to realize that they must formulate
Chile, Haiti and New
new coverage guidelines, and pricing policies, and that they need new tools to do so.
Zealand can happen in
“Many companies writing in earthquake prone areas do not have the level of detail they
the United States
should have,” says Dan Munson, the Founder for RiskMeter, a company that specializes in
geographic underwriting information for insurers. Munson notes that insurers often rely on
broad, county-level assessments that either rule out—or rule in—large areas, when they need
more specific information about earthquake conditions that could jeopardize structures on
a location-by-location basis. “A county map is not sufficient,” adds Munson. “There may be
areas of good soils there, and areas of soft soils close by. They can lead to very different
losses, even between locations that are very close to one another. Our tools give insurers the
opportunity to be more sophisticated with their underwriting.”
The lesson to be drawn from the globe’s massive quakes is clear. What happened in Japan,
Chile, Haiti and New Zealand can happen in the United States. It is entirely possible for
America to have a major quake in several regions, with devastating impact on lives and infrastructure. Pacific quakes could cause previously unimagined damage to Hawaii, California,
Washington and Oregon. The time is now, Munson says, to assess possible losses and blunt
their impact.
“These risks are real. What happened in Japan can happen here and we can prepare for it.
We can help people to be proactive in managing risk rather than counting losses. In this
business, companies that can better select and price risk win.”
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May, 2011
About RiskMeter.com
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of operations, the RiskMeter Online is an Internet application used to automate property risk reports. The
RiskMeter Online provides over 30 real-time reports, including Distance to Coast, FEMA Flood Zones,
Rating Territories, Windpool Eligibility, RMS & EQECAT Data & Analytics, Individual AAL & PML Reports,
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a web service. For more information or to get a FREE trial account, call 1.800.746.7797, Email [email protected] or visit www.RiskMeter.com.
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NOTES
1: U.S. Geological Survey, “Magnitude 7.0 – Haiti Region”, http://earthquake.usgs.gov/earthquakes/eqinthenews/2010/
us2010rja6/#summary.
2. U.S. Geological Survey, “Earthquake Myths”, http://earthquake.usgs.gov/learn/faq/?categoryID=6&faqID=110.
3. Tokyo Metropolitan Government, “Population of Tokyo”, http://www.metro.tokyo.jp/ENGLISH/PROFILE/overview03.htms
4. http://www.eqecat.com/pdfs/2010-earthquakes-in-review.pdf
5. National Police Agency of Japan, “Damage Situation and Police Countermeasures associated with 2011 Tohoku district – off the
Pacific Ocean Earthquake”, http://www.npa.go.jp/archive/keibi/biki/higaijokyo_e.pdf
6. http://www3.nhk.or.jp/daily/english/12_05.html
7. http://www.cfo.com/article.cfm/14569399/c_14570101
8. http://energy.wesrch.com/page-summary-pdf-TR17TEBW5GVMN-measuring-the-economic-damage-of-the-sendai-disaster-3
9. http://mdn.mainichi.jp/mdnnews/business/news/20110428p2g00m0bu071000c.html
10. U.S. National Science Foundation, “Geo-Engineering Reconnaissance of the February 27, 2010 Maule, Chile Earthquake” ,
http://www.geerassociation.org/GEER_Post%20EQ%20Reports/Maule_Chile_2010/Maule_Chile_2010_index.html
11. http://english.kyodonews.jp/news/2011/04/82888.html
12. http://articles.sfgate.com/2011-03-12/news/28682501_1_deadly-tsunami-harbors-docks
13. http://seekingalpha.com/news-article/889258-insurers-reinsurers-wobble-on-latest-japan-quake
14. http://online.wsj.com/article/SB10001424052748704336504576259161606455194.html
15. http://www.munichre.com/en/media_relations/press_releases/2011/2011_01_24_press_release.aspx
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