RMS Expects China Earthquake to Result in Large Number of Insurance Claims

China's worst earthquake in three decades with a 7.9 magnitude has killed at least 12,000 people with thousands still missing. Additionally, according to London-based Risk Management Solutions Inc. (RMS), the earthquake that hit Sichuan Province in China yesterday is expected to generate a large number of insurance claims.  
 
The quake, among the most powerful to hit a populated area in recent years, flattened school buildings, shops and homes across a wide, mountainous area around the epicenter. It occurred in a mountainous region outside of the province’s capital, Chengdu, the 10th-largest city in China with a population of 4.5 million.  
 
According to London-based RMS, much of Chengdu’s development has occurred over the last 30 years, with the majority of its buildings constructed after 1978, when buildings were required to be made more earthquake-resistant.  
 
“Although many of the commercial buildings will have been constructed to withstand some level of ground-shaking from earthquakes, we can expect to see a large number of insurance claims coming from this area,” Domenico del Re, senior model manager at RMS, said in a statement. “This event is a reminder for organizations considering moving into China that business continuity insurance should be a risk management priority, due to the country’s susceptibility to earthquakes.”  
 
Boston-based catastrophe modeler AIR Worldwide Corp. reported that while China's newer high-rise buildings are generally made of reinforced concrete, built to higher standards than in the past, many of these newer buildings are untested under large-magnitude earthquakes.  
 
AIR said in a statement that it is currently analyzing the damage from the quake to get an estimate of insured losses, but said insured losses will be mitigated by low earthquake insurance take-up rates, which AIR estimated to range between 2% and 5% in the region of the epicenter. However, take-up rates for projects under construction are higher—up to 40%—which may have a significant impact on insured losses, AIR said in the statement.

Source: Source: Business Insurance, WSJ | Published on May 13, 2008