Chilean insurance association AACH is estimating insurers will have to pay at least US$2.5bn-2.6bn to cover damage stemming from a massive 8.8-magnitude earthquake that hit central and southern Chile on Saturday, insurance association AACH chairman Mikel Uriarte told press on Monday.

The estimate is based on claims paid in a 1985 magnitude 8 quake. Back then, insurers paid out 7.2% of total damage incurred in the country.

However, these numbers are bound to rise as information on the full extent of damage in southern Chile - especially around the country's second largest city of Concepción - is still scarce because of the continued telecommunications problems due to power cuts.

The US$2.5bn-2.6bn figure would come on top of the approximately US$5bn that Chilean insurers pay out in claims every year, Uriarte noted.

The executive called Saturday's earthquake the "biggest catastrophe for the insurance industry," adding that insurers are prepared to face a colossal amount of claims and give coverage to its policyholders.

The quake killed over 700 people and is one of the five strongest recorded in the world over the past century. It was centered 200 miles (317 kilometers) southwest of Santiago, on a portion of the fault zone between two previously devastating earthquakes in 1960 and 1922.

ASSESSING THE LOSSES

US catastrophe risk modeling firm AIR Worldwide said it estimates that insured losses from the earthquake will likely exceed US$2bn, with total economic losses exceeding the US$15bn mark.

"The total economic loss will likely be severe from damage not only to buildings, but from the widespread impact on infrastructure including roads, bridges, airports and utilities and telecommunications networks," Jayanta Guin, senior VP of research and modeling at AIR Worldwide said in an emailed statement.

According to AIR, the area from Concepción to Santiago impacted by the quake contains residential and commercial properties with an insurable value of about US$275bn. Of this total, approximately 70% is in the Santiago area and approximately 5% in Concepción. However, of the damage incurred to these properties, only a portion is expected to be insured, AIR said.

Some of the largest losses are expected to come from large industrial facilities, with oil refineries appearing to be the most affected, California-based Risk Management Solutions (RMS) said in an emailed statement. Copper mining is Chile's largest export activity and production was interrupted by power shortages, but there has been no structural damage to the facilities reported so far.

"Given the recent history of earthquakes, insurance penetration in Chile is relatively high at around 3.5% of GDP. To put this in context, coverage there is higher than in Mexico, although still lower than the US," RMS VP Claire Souch said.

"A lack of power and damage to infrastructure is likely to increase demand for materials and labor and escalate insured losses. As previous events have shown, this could be in the order of 30%," she said.

Uriarte said AACH's preliminary calculations are also based on estimates by US catastrophe modeling company Eqecat, which put the total economic damage caused by the earthquake between US$15bn-30bn, or 10-15% of the country's GDP.

However, finance minister Andrés Velasco quickly came out to rebut Eqecat's report, saying that the figures were given by a foreign company that used a purely theoretical model, with no solid information.

"We will build the figures directly from the people affected, from the companies and the neighborhoods, and that cannot be done in 24 hours," Velasco told local radio station Cooperativa.

Eqecat also said that up to 65% of the damage is expected to be in residential structures, with commercial damage accounting for 20-30% and industrial damage expected to be 15-20%.

While the quake caused a "major disaster, Chile's widespread adoption and enforcement of modern, seismic-resistant building practices has mitigated the potential for devastation," Eqecat's note reads.

EARTHQUAKE INSURANCE

AACH estimates only 6% of the country's homes have earthquake insurance, as it is sold as an additional policy to fire insurance.

The additional earthquake coverage is pricy, AACH general manager Jorge Claude told reporters, costing twice as much as the coverage for fire. Most of the policyholders in this segment are higher-income individuals.

Housing and urbanization minister Patricia Poblete said over 1.5mn homes saw significant damage, and 500,000 housing units suffered severe damage. However, it will take between 15-20 days to assess the earthquake's full impact, she said, adding that of the buildings that have fully collapsed, many are of older design and include numerous historic structures, as would be expected.

In the case of earthquake premiums, local insurers retain what is adequate according to their equity capacity and to maintain healthy solvency levels, with a "very high" portion being ceded to reinsurers, Claude said.

Earthquake insurance sales in Chile fell 2.1% to 90.6bn pesos (US$173mn) last year.

Jorge Porter
Business News Americas