Earthquakes happen more regularly than is often realized. This year has already seen a number of serious earthquakes, but also many more tremors of a smaller scale. By the end of September, more than 50 major earthquakes had been tracked worldwide[1].
Sometimes, the impacts are huge. The economic losses from this year’s Noto earthquake in Japan, for example, is expected to run to $17.6bn[2], while Taiwan saw its strongest earthquake in 25 years.
In Europe, multiple buildings collapsed in the Turkish town of Sulusaray following another earthquake[3]. In South America, Brazil was recently struck by one of its strongest earthquakes for many years[4].
But even smaller tremors have the potential to cause damage. It is therefore vital that organizations vulnerable to earthquake risks address this issue.
An earthquake is the shaking of the ground as energy is released from two of the Earth’s tectonic plates slipping past each other.
We know there are typically around 15 major earthquakes each year around the world, but it’s impossible to predict exactly when or where one will strike.
The largest and most destructive earthquakes tend to occur at the boundaries between tectonic plates, but they can happen almost anywhere.
The impacts can be disastrous. Not only can the tremor itself cause significant destruction, but there is the potential too for secondary damage from knock-on effects such as tsunamis, landslides and sinkholes. An earthquake can also cause fires and explosions – if gas or electricity infrastructure is affected. All these dangers increase the risk to life and property and can drive up business losses.
The scale of an earthquake can be measured in two different ways. The “Moment Magnitude (Mw)” measures the total energy released by an earthquake; the “Modified Mercalli Intensity (MMI)” measures the intensity of the shaking at particular locations, which is affected by the geology and soil types at those locations.
While earthquakes are inherently unpredictable, there are ways for organizations potentially affected to assess how much damage they might face if their sites, buildings or equipment were to be hit by a tremor.
One method is to study records of previous earthquakes. This data can be used to map the location and intensity of earlier quakes in a particular region, in order to generate a picture of the higher and lower risk areas.
However, while this can be a useful exercise, it’s limited – seismic records typically go back 100 years or so, meaning older and possibly more powerful earthquakes aren’t always included in the analysis.
Catastrophe modeling tools provide more sophisticated insights into earthquake risk. These tools take into account the latest scientific understanding and data to calculate the likely financial losses from a range of possible earthquake scenarios.
By utilizing these results, organizations gain a comprehensive understanding of where their risk of earthquake-related losses is highest. The models also make it easier to assess whether the organization’s insurance coverage is sufficient.
In practice, the more information – and the better its quality – that catastrophe models incorporate, the more accurate the analysis will be. Factors that the models consider include the local geology, soil type and the vulnerability of buildings.
The model thus requires detailed geolocation data and construction information.
It's important to recognize that earthquake-related losses can have far-reaching impacts. For example, when the 2011 earthquake and subsequent tsunami struck Japan, industries like the automotive sector experienced a significant and prolonged reduction in capacity. This, in turn, affected their customers, who faced supply chain disruptions as a result.
Some were able to claim compensation under contingent business interruption cover.
With so much at stake, strategic risk consultancy for earthquakes can prove invaluable.
The damage caused by two earthquakes of the same magnitude in different locations, or even a single earthquake affecting two areas within the same region, can vary significantly. As a result, organizations need specialist guidance to make informed decisions about risk mitigation and insurance options.
Once organizations understand their risk exposures in more detail, they can begin to make decisions about how to respond in the most cost-effective ways.
For example, a North American real estate investment company with a portfolio of properties in an earthquake-prone area wanted to identify which risk mitigation measures would give it the greatest benefit.
Catastrophe modeling tools identified three buildings in its portfolio that accounted for 60% of its total earthquake risk.
These buildings were constructed from unreinforced masonry, making them especially vulnerable to tremors. Although retrofitting with stronger materials would cost $10 million, the process could reduce potential losses by as much as $150 million.
A range of insurance products may also be appropriate to protect against earthquake risk.
These include both conventional cover and parametric insurance, which pays out a set amount to the policyholder in the event of a specific threshold being met, rather than according to losses as determined through a loss adjustment process.
In an earthquake context, such cover might be triggered if an earthquake with an epicentre within an insured area exceeds a certain magnitude.
This sort of insurance can be helpful for covering gaps left by property policies – perhaps where certain types of risk are not covered, or where higher excesses or lower limits apply.
Parametric cover also provides certainty – policyholders know what claim amount they will receive in specific circumstances – and claims can usually be settled quickly, as no formal loss adjustment process is required.
That said, policyholders must accept the policy won’t pay out if the trigger level is not met, even if they have suffered losses.
In one recent example, a US public entity with sites across a wide area wanted to ensure it would have access to immediate cash support in the event of a significant earthquake.
It arranged a parametric solution that provided for a payout if ground shaking, as measured through peak ground acceleration (in units of percentage of gravitational acceleration (%g), was above a certain level in specific locations. At 45%g (strong shaking), the pay-out would be $5million, rising to $10million at 60%g (very strong shaking), and to $20million at 75%g (severe shaking).
The insurance provided instant access to support during critical earthquakes with payouts independently calculated using open-source data and a pre-agreed formula.
And by structuring the policy over three years, it was possible to keep premiums down, as the chance of a large earthquake in any one of those years is low.
In practice, each situation is different. The most appropriate way to manage earthquake risk will vary from one organization to the next, depending on its individual circumstances.
The starting point is to assess exposure – that will define the right response.
Contact us now to discuss how we can help you through this process to manage earthquake risk more effectively.
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For specialist help discovering smarter ways to manage earthquake risks, please get in touch.
