Insured earthquake losses in the US$3bn-8bn range - Eqecat

Tuesday, March 2, 2010

US catastrophe modeling company Eqecat has put insured losses caused by the magnitude 8.8 earthquake that occurred off the coast of central and southern Chile on Saturday (Feb 27) in the US$3bn-8bn range, or 25% of total economic losses.

This loss represents 15-40% of the estimated insured limits for earthquake coverage, the firm said Tuesday in a press release.

Eqecat said the range of this initial estimate of insured loss is correspondingly wide, as the company has not yet been informed by on-the-ground data or a geographic distribution of insured values at risk.

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Another catastrophe risk modeling firm, AIR Worldwide, has estimated that insured losses from the earthquake will likely exceed US$2bn.

On Monday, Chilean insurance association AACH said it gauged local insurers will have to pay at least US$2.5bn-2.6bn to cover damage stemming from the earthquake.

AACH chairman Mikel Uriarte called Saturday's earthquake the "biggest catastrophe for the insurance industry."

Industry sources told BNamericas that firms like Eqecat and AIR based their estimates on information provided by global reinsurers that cover risks in Chile.

"These are theoretical models, based on productivity estimates by region. I understand they are very conservative and tend to underestimate losses. At least that's what has happened in large claims around the world," an expert said.

UK insurer RSA, which is the leading P&C insurer in the country through its subsidiary RSA Chile, said on Tuesday it estimates a cost of around 30mn British pounds (US$44.8mn), net of reinsurance, for claims arising from the event.

Based on this estimated cost, RSA does not expect the earthquake to affect its recently announced goal of achieving a combined operating ratio of around 95% for 2010, the company said in an emailed statement.

In Chile, it is estimated that about 90% of property policies carry earthquake coverage. However, only about 10% of residential properties and 60% of commercial properties are insured, according to Axco Insurance Information Services.

Chile is located in a high-risk seismic area, and its half-century commitment to strengthening building codes saved countless lives, Robert Hartwig, president of the Insurance Information Institute (III) and an economist said in an emailed statement.

"Chile's building codes are among the most stringent in the world. Had Chile not heeded the lessons of another devastating earthquake in 1960 and not invested in earthquake resistant building designs, the country's situation would resemble that of Haiti, where an earthquake on January 12 killed more than 200,000 people," he said.

The current death toll in Chile is estimated at 795, according to government sources.


The billions that insurers will pay to rebuild Chile will be a critical factor in stabilizing the local economy in the wake of the worst disaster the country has ever faced, Hartwig said.

"Insurance is the swiftest, most efficient means to recover after catastrophic events," Hartwig added.

Eqecat said its previously stated estimate of economic damage from the earthquake in the range of US$15bn-30bn remains unchanged. AIR Worldwide said total economic losses would exceed the US$15bn mark.

On Tuesday, Chilean President Michelle Bachelet said the government will need more time to effectively assess the full economic cost of the damage, adding that the reconstruction will take "a lot of time and a lot of money."

In a report, JPMorgan (NYSE: JPM) said Chile's economy will likely expand 5.5% this year, above the 5% previously forecast, because of reconstruction work after the earthquake.

According to Jayanta Guin, senior VP of research and modeling at AIR, the total economic loss will likely be severe from damage not only to buildings, but from the widespread impact on infrastructure including roads, bridges, airports and utilities and telecommunications networks.

Primarily, the forestry products sector is expected to be one of the most affected by the earthquake, local brokerage Banchile said in a report. Considering that practically all the domestic pulp operations are located in the VII and VIII regions, the two most affected by the quake, one could expect operations to be shut down for at least a few weeks.

"Even though we believe that insurance will cover most infrastructure damage and production losses, the impact on short-term results could be significant," said Banchile.

Integrated iron and steel group CAP was one of the most affected companies in the steel and mining sector. The facilities of the Huachipato steel complex in region VIII were severely damaged by both the earthquake and the large waves on the shore of San Vicente bay in Talcahuano (near Concepción). The company has stated that insurance will cover part of the damage.

In the electric sector, the most significant problems have been related to the distribution business, while generation operations have not indicated relevant damage as of yet. At this point, generators Endesa and Colbún have not yet found any structural failures in damns or thermal units located in the affected zone. According to the companies, insurance should cover the damage.

In the distribution business, Banchile said it believes CGE is the most exposed, given that it operates in the VII and VIII regions. "Without official information from the company, we assume that its insurance coverage will reduce potential losses," Banchile said.

In the beverage sector, Banchile said it does not foresee a relevant impact on bottler Andina or winery Concha y Toro. In the case of the latter, the most significant damage was to its warehouses, where some wine was lost and certain tanks were impacted.

Although Concha y Toro noted that such losses will be covered by insurance, Banchile expects 1Q10 results to be affected due to operational problems related to the temporary closure of the main ports in Chile (which should resume operations in the coming weeks).

For Andina, which operates only in Santiago and its surroundings, the main losses are related to inventories, although again the company has stated it has coverage.

Department store chain Falabella said it is fully insured against all damage to stores and stock, and that to its knowledge it has not experienced robbery or looting of its stores in the affected areas, according to Banchile's report.