Posted on 02 Mar 2010
Insured losses from a devastating earthquake in Chile could exceed $8 billion, a level that probably won't have a big impact on reinsurers or the pricing of insurance.
Chile's well-developed economy and reliance on private insurance coverage will aid in its recovery, unlike some other emerging markets that have been through devastating natural disasters.
Catastrophe risk modeling firm, Eqecat Inc., estimated that insured losses from the 8.8 magnitude earthquake that hit Chile Saturday could range from $3 billion to $8 billion, or 25% of the total economic losses. The company said the loss represents 15-40% of the estimated insured limits for earthquake coverage. The firm noted that the estimate range is so wide because it was not formed by on-the-ground data and the extent of Chile's infrastructure damage is still unclear.
Eqecat estimates that the economic damage could be about 10% to 15% of Chile's gross domestic product. Chile's GDP was an estimated $244.3 billion in 2009, according to the U.S. Central Intelligence Agency.
Earlier Monday, AIR Worldwide, another catastrophe risk modeling firm, estimated that insured losses from the earthquake could exceed $2 billion. The total economic losses could be more than $15 billion, the company said Monday. The loss estimate takes into account insured damage to property, business interruption losses and higher prices for cleanup and redevelopment materials, services and labor due to a surge in demand after the catastrophe.
In a research note to clients, Goldman Sachs analyst Alberto Ramos said he expects the earthquake to hurt Chile's GDP in the first of half of this year.
"After activity normalizes we should see an extra bounce to activity anchored on the reconstruction effort to rebuild the lost or damaged capital stock of the economy," he wrote.
Ramos added that mining operations in the northern region of the country "seems to have been spared," but two oil refineries were closed due to lack of power supply and apparent structural damage. Chile, the world's largest supplier of copper, "sustained limited direct damage," the Goldman report said.
Saturday's earthquake struck a less populated, more residential area of Chile, which won't lead to heavy insured losses. Macquarie Equities Research doesn't expect significant losses for reinsurers, including Swiss Reinsurance Co., Munich Re AG, XL Capital Ltd., and ACE Group.
Sometimes losses can lead insurers to increase prices for insurance. But "We do not foresee this as a potential pricing catalyst for the [reinsurance] industry," wrote Macquarie analyst Bill Yankus in a research note.
The four reinsurers didn't immediately return calls for comment.
This is the second major earthquake to hit the Western Hemisphere in the past two months. In January, a magnitude-7 earthquake hit Haiti, causing mass devastation in the poverty-stricken country. Haiti was set to receive up to $8 million from its main catastrophe insurer, the Caribbean Catastrophe Risk Insurance Facility--a regional fund administered by participating governments.
Chile's insured losses will far exceed that amount because the country has more private insurers, and "the more advanced the economy, the larger the catastrophe losses," said Robert P. Hartwig, an economist and president of the Insurance Information Institute.
About 90% of homeowners in Chile have property policies that cover earthquakes, Hartwig said, citing information from Axco, an independent supplier of global insurance market information. By contrast, roughly 12% of homeowners in California, a U.S. state vulnerable to earthquakes, have such coverage.
Chile suffered one of the largest earthquakes in history in 1960, when 1,655 people were killed. Since that time, the country has put much effort into its earthquake preparedness. Hartwig said, "There is an old adage earthquakes don't kill people, buildings kill people in earthquakes. Chile has managed to avoid massive losses of life because of adherence to stringent building [codes] over the past half century."