China Quake Insured Loss Put At $1 Billion

The giant killer earthquake that rocked China caused an insured loss of between $300 million and $1 billion, catastrophe risk modeling firm AIR Worldwide estimated.

The Boston-based firm said uninsured property damage would be about $20 billion. The estimates cover property losses for residential, commercial/industrial and Construction All Risks / Erection All Risks (CAR/EAR) lines of business.

Meanwhile, Eqecat in Oakland, Calif., which has not yet figured insured loss said that economic damage from the quake probably will not exceed $75 billion. Tom Larsen, senior vice president for Eqecat said that estimate was “really rough.”

AIR said there is a high level of uncertainty in insured loss estimates in China where the insurance market is rapidly developing and earthquake coverage is optional for both residential and commercial policies.

The firm said it estimates that insurance take-up rates in the vicinity of the Chengdu region (the percentage of buildings actually insured against the earthquake peril) are minimal for residential properties and only marginally higher for commercial properties.

Although earthquake coverage is mandatory for policies covering construction projects (the CAR/EAR line of business), in many cases companies do not purchase insurance for smaller projects, AIR said.

“Monday’s earthquake occurred along the Longmeng Shan fault in the North-South Seismic belt of Central China,” said Bingming Shen-Tu, China project manager at AIR Worldwide.

“This belt, which runs from Gansu and Nixian provinces in the north to Sichuan and Yuan provinces in the south, is the most seismically active region in China. It also presents the highest risk in China because of the proximity of large concentrations of population. Indeed Sichuan is China's most heavily populated province.”

AIR estimated that the total value of property in Chengdu exceeds $115 billion, of which only a small percent is covered by insurance. Total property value in all counties of Sichuan province affected by yesterday's event is estimated by AIR to be $215 billion.

Mr. Larsen at Eqecat said, “The biggest challenge,” he said, is figuring out what fraction of the damage is insured and what portion of it goes to global markets and what part is retained by Chinese companies.

Mr. Larsen explained that the biggest commercial center to be impacted is Chengdu, the capital city of Sichuan Province, where ground motion was strong to very strong, but damage is expected to be light to moderate.

“We do not expect to find significant collapses. The bulk of the commercial areas are not seeing that. They are seeing modest infrastructure damages,” he said.

However, in Dujiangyan city, 30 miles from Chengdu, 80 percent of the buildings were reported to have collapsed.

Typically the infrastructure problems for Chengdu will involve interruptions of electricity, which can take a few days to a week to repair, Mr. Larsen related.

Most of the worst impact, he said, was in a lightly populated, mountainous area. Damage to older buildings located near the epicenter was very severe, he said, but the impact on economic activity was slight.

Mr. Larsen said companies with the greatest percentage of business interruption insurance would generally be those secured by joint venture capital and would not likely involve more regional kinds of commerce.

He said newer buildings within the impacted area had more engineering review, so Eqecat “would expect a lot less damage.”

The $75 billion economic damage figure, he noted, is a far cry from the $150 billion estimated economic destruction left behind after Hurricane Katrina hit the United States in 2005, and “a very small fraction of that” would be an insurance loss.

Aon Re Global said reports of damage that are coming indicate economic loss from the quake will be significant, but the insured loss is expected to be much smaller as the insurance take-up rate in the region most affected by the earthquake is estimated to be between 2 percent and 5 percent for general property.

However, insurance take-up rates for projects under construction (CAR/EAR risks) is expected to be much higher (RMS 2008) and could contribute to a higher insured loss for insurance companies whose portfolios are heavily weighted toward CAR/EAR risks.

Aon said it is still in the process of modeling the event and expects to eventually have initial estimates of industrywide losses and client losses.

Insurance Information Institute said the quake in the southwestern region of China yesterday registered a 7.9 on the Richter magnitude scale, stronger than the 7.5 magnitude quake which struck the country in July 1976, killing tens of thousands of people.