RMS Estimates China Quake Property Losses Could Reach $15 Billion

May 15, 2008

As the magnitude of the earthquake that struck China’s Sichuan Province on Monday, and the extent of the damage it caused, becomes more apparent, the loss estimates from the quake have escalated rapidly.

Risk Management Solutions most recent analysis now indicates that property losses will be between $10 and $15 billion. RMS noted that “infrastructure damage and interruption to economic activity caused by the magnitude 7.9 earthquake will amplify the total loss, as the full financial impact of the disaster unfolds.”

RMS said it “has been working with its scientific partners in China, the Institute of Engineering Mechanics (IEM), to assess the damage from Monday’s event. Though the earthquake was centered in a relatively sparsely populated area, it was powerful enough to cause damage in Chengdu – 90 kilometers from the epicenter and China’s 10th largest city by gross domestic product (GDP) – where more than 30 Fortune 500 companies and 12,000 domestic organizations are situated.”

However, RMS indicated that “only a fraction of the property loss will be borne by the insurance industry,” even though the quake is likely to “cause the highest insured losses in the country to date.” RMS explained: “Insurance penetration varies significantly by line of business, ranging from negligible for residential property, over 50 percent for high-end commercial buildings in Chengdu and full coverage for the industrial facilities owned by multinational companies.”

Domenico del Re, senior model manager at RMS, explained: “Business continuity will be a fundamental issue, as the areas affected are burgeoning manufacturing zones for hi-tech companies. Some companies have already reported disruptions to their operations and this could have serious ramifications, not just for these organizations but for those downstream of the supply chain. Events like these highlight the need for companies to manage their risk of contingent business interruption.”

RMS compared the Chinese earthquakes to recent similar events “in Kobe in 1995, Taiwan in 1999 and more recently in Niigata, Japan in 2007,” noting that they have all “occurred in manufacturing regions and caused delays in production.” In addition RMS said: “Large swathes of China are seismically active and the risk is particularly high in the central region where more companies are moving their operations to take advantage of cheaper labor and property costs.

“However, insurers and reinsurers should not be deterred from writing business in the region.” Del Re added: “This event does not signify that earthquake risk is uninsurable in China, and the industry should not overreact. The tools are available for insurers and reinsurers to price and manage the risks effectively.”

Source: Risk Management – www.rms.com.

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