Questions of coverage in the wake of Italy’s August earthquake

Last week’s earthquake in central Italy raises questions regarding the lack of earthquake insurance take-up and resilience measures, also available techniques for managing earthquake catastrophe accumulations.

24th August central Italy event in context

Willis Re expect that economic and insured losses from the August 24th event will be significantly below that of the 2009 L’Aquila  (€502m, source: Swiss Re) and 2012 Emilia events (€1.2bn, source: Willis Re). The lack of earthquake insurance take-up is evident in that both 2009 and 2012 events caused in excess of €10bn of economic damage, which equates to a sizable 0.6% shock to Italian GDP.

Just 1% of properties are insured for earthquake in Italy.

As in 2009, the August 2016 earthquake hit a largely residential area where earthquake insurance take-up is relatively low. Subsequently the impact to insurers’ earnings and capital is expected to be small, especially so given that catastrophe exposure is a small share of overall non-life and life premium and liabilities in Italy. By contrast the 2012 Emilia earthquake had a larger impact as that event hit a region with a greater proportion of commercial and industrial exposure and hence with a higher take-up.

Events such as the 2009 and August 2016 earthquakes are unfortunately fairly frequent in central Italy, with 10 events occurring since 1950, along a 120 km long stretch of the northwest-southeast oriented Central Apennines mountain range. The 24th August 2016 event was the largest to occur since the 2009 L’Aquila earthquake (magnitude 6.3), where more than 300 people were killed and 60,000 homes were destroyed.

Figure 1: Wednesday 24th August Amatrice and 2009 L’Aquila earthquake events, with surrounding 1950-2016 historical events by earthquake magnitude (Source: Global Earthquake Model)

Wednesday 24th August Amatrice and 2009 L’Aquila earthquake events, with surrounding 1950-2016 historical events by earthquake magnitude (Source: Global Earthquake Model)

Despite the relatively high frequency of earthquake events, it is estimated that 64% of the Italian population live in areas where the buildings are not equipped to handle a significant seismic event (Source: Swiss Re). Resilience to such earthquake events could be increased with greater retrofitting of historical buildings and compliance to engineering design codes.

Measures to address the lack of residential earthquake insurance protection in Italy

Furthermore, residential earthquake insurance take-up in Italy is low for earthquake and flood perils; with just 1% of properties (source: Swiss Re) insured for earthquake, with cover being heavily loss limited. The key reason for the low take-up is that there is an expectation that the Italian government effectively provides a guarantee to cover the public from such events.

Given the current strains on the Italian economy, greater private provision of earthquake insurance would be a more effective way of increasing societal resilience. Evidence from other countries shows it is important for governments, businesses and other institutions to manage the risk up front, rather than paying for the damage post-event. Insurance and reinsurance provide meaningful incentives to improve risk mitigation and develop a resilient economy; the benefit after an event is immediate.

From considering the example of other earthquake-exposed countries, for take-up to increase the purchase of insurance could be made compulsory to some degree, as it is in New Zealand or Turkey.

Table 1: Earthquake insurance take-up rate for selected exposed countries

Earthquake insurance take-up rate for selected exposed countries (Source: Swiss Re, New Zealand: estimate, Turkey: Axco 2016 estimate, Japan: GIROJ – 60.2% of the people who bought fire insurance decided to buy EQ insurance as an “add-on”.)

In aiming to overcome the unpopularity of any compulsory insurance purchase, the Italian state or local governments could form their own public, not-for-profit insurance schemes, as many other European countries do. Premiums levied could also be tax deductible as a further incentive.

From experience of other such schemes, the degree of cross-subsidization between regions could be politically sensitive, so flood cover could also be provided to add broader balance to any scheme and to widen societal benefit.



TimEdwards_300Guest Blogger Tim Edwards leads Willis Re’s European catastrophe modelling team, based in London. He holds a BSc (Hons) Economics degree and is ACII qualified. Tim has been with the company since 2010 and co-ordinates the European Catastrophe Analytics team. He leads analytical initiatives covering the Willis View of Risk, model evaluation, emerging risks and portfolio optimization.

Categories: Natural Catastrophe, Reinsurance | Tags: ,

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