Swiss Re Continues Investigation of Tidal Wave Disaster’s Insurance Implications

December 29, 2004

Swiss Re has issued a bulletin commenting on the Indian Ocean disasters, indicating that the complex nature of the event, makes it extremely difficult to project loss estimates.

“Tens of thousands of lives have already been lost in this awful tragedy, which has devastated a number of the world’s poorest regions,” the bulletin stated. “The sheer scale of the event and the absence of comparable historical events will make it difficult to obtain an immediate overview of losses incurred.”

The world’s second largest reinsurer said it “is investigating the insurance implications, but the situation is more complex with this type of disaster than with more familiar catastrophe scenarios. While highly sophisticated modeling techniques are widely used to determine tropical cyclone or conventional earthquake shock losses, this is not the case with tsunamis. Particularly if they are of the scale witnessed on 26 December, tsunamis are not only extremely rare – no major tsunami has hit a densely-populated area in the past forty years – but they also have far more complex characteristics than the more frequently occurring windstorms. This recent event was also highly unusual in its range, bringing death and destruction to coastal areas around the Indian Ocean.”

It also noted that tsunamis and their loss potential are difficult to assess as “they can be unleashed by a variety of causes, such as an earthquake, a volcanic eruption, a landslide or meteor impact. This makes it difficult to estimate the frequency, point of origination and dimensions of a major tsunami event. Further aggravating factors are the water run-up characteristics, which vary greatly depending on the shape of the shoreline and the seabed.

“An adequate assessment being virtually impossible for these reasons, Swiss Re does not explicitly model the tsunami risk, but includes a tsunami exposure charge aligned to the modeled earthquake shock losses.”

Swiss Re also indicated that the lack of “communications links” made it very difficult to obtain information concerning the affected areas, and that “no reliable assessment can be made at present.” It noted, however, that “most of the insured losses are likely to concern property damage and business interruption in tourism. Marine hull and cargo lines will also add to the total, while other lines, such as travel, accident and life covers are likely to be affected to a lesser extent.”

Swiss Re concluded: “The massive tsunami is the latest disaster in a year marked by a string of natural catastrophes. Even excluding this event, the year 2004 is likely to cost an estimated $40 billion in natural catastrophe claims for the insurance industry, making it a record year before 2001 with a claims burden of $37 billion.”

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