The 8.8 earthquake that hit the central coast of Chile on 27 February 2010 was the biggest natural disaster that the Chilean general insurance market has ever had to face.
The losses from the catastrophe totaled around US$30billion, with the insurance market paying out around US$8billion. The most affected industries included housing, tourism, fishing and education. Of these losses, 71% was infrastructure damage, and around 75% of Chile’s population was affected by the disaster.
The earthquake was the fifth most costly on record, the first being that of the Tohoku quake in Japan in 2011, which cost $25billion in insured losses. When considering the total cost of insured losses from the Chile earthquake, it is important to remember that the Chilean market currently generates around US$432 million in premium in quake cover. For a disaster that cost the industry an about US$8billion, it would take around 21 years to recover this.
The disaster had a number of wide-reaching implications for the local insurance market:
- Rates increases between 50 – 150%: a premium hike which lasted for around two years. Rates are now beginning to drop off and we believe they should reach pre-earthquake levels over the next 12 months.
- Variation in deductibles: earthquake deductibles were limited in most cases to 2% of the insured amount; this limit has now been eliminated.
- Changes in underwriting policy: Before the quake, insurers would generally only send engineers to evaluate and inspect those risks whose insured amounts were considered significant. After suffering heavy quake and tsunami losses, they realized they did not know the extent of many of their exposures. This has led to more stringent underwriting and now all risks are inspected by engineers before being accepted by underwriters.
Thanks to the critical role that the international reinsurance market had in covering a large part of quake losses and in maintaining the effective levels of local reserves, this catastrophic event did not cause any serious solvency issues amongst local insurers.
A Positive Response – Moving On
Overall, the response of the local insurance market was sound, and has been subject to many improvements that have been subsequently implemented to improve aspects of trading and settlement for quake cover. For example, only six months after the earthquake nearly 100% of (residential) property losses reported were successively inspected by loss adjustors, and around 84% of them were settled promptly.
Three years on and nearly 100% of insured losses have been settled, communities have been rebuilt and the insurance market has recuperated well. The Chilean Central Bank forecast 2013 GDP Growth of around 5%, which will hopefully allow the Chilean insurance market to grow 6.5% in 2013 and build on the 10 per cent growth in capacity it saw in 2012, and allow Chile and its economy to move on from one of the most devastating catastrophes in its history.
Alfredo Schmidt, Manager, Property and Casualty, Willis Chile, has over 20 years’ experience in insurance. His main responsibilities are business development of clients in the Property, Casualty and Construction sectors.