Insurers Brace for Quake Aftermath

Insurers are evaluating their portfolios against losses of up to $12 billion from New Zealand’s Christchurch earthquake. The earthquake, now being estimated by the Insurance Information Institute rankings as the seventh-most costly natural disasters for insurers since 1970, and is the worst in 80 years to hit New Zealand, notes JP Morgan Chase.

Insurance Australia Group, Australia's leading home and car insurer, said in a statement that it is exposed to a maximum of U.S.$53.5 million (A$40 million—$40.4 million—$1 = 0.991 Australian Dollars) in claims stemming from the earthquake. The insurer cut its forecast insurance margin for this year to 8% to 10%.

IAG chief executive Karl Armstrong told Sharechat.com, a New Zealand website for share market investors, that while the Earthquake Commission and insurers would absorb the bulk of the costs, something had to be passed on. "At this stage it's early to tell but the likelihood is there'll be increased costs for everyone," he said.

Catastrophe modeling firm AIR Worldwide estimates that overall industry insured losses from the moment magnitude 6.1 earthquake will be between NZD $5 billion ($3.5 billion USD) and NZD $11.5 billion ($8 billion USD).

The quake caused extensive damage in the city center, and was the second major quake to strike the city in six months. Damage in this city of about 375,000 people is widespread, and aftershocks, of which there have been several, remain a concern. (AIR notes that while seismological agencies are reporting a local (Richter) magnitude of 6.3 for this earthquake, this translates to a moment magnitude (Mw) of 6.1 according to calculations made by the USGS.)

“Christchurch is New Zealand’s second largest city, and while design requirements for new construction are stringent, many historical buildings dominate the central business district, and they are predominately of masonry construction,” said Dr. Arash Nasseri, engineer at AIR Worldwide. “Few have undergone seismic retrofit. Structures may also have been weakened by the magnitude 7.0 earthquake that took place in early September of last year. Although Tuesday’s quake—considered to be part of the aftershock sequence of the September event—was smaller in magnitude, it has been more damaging because it was closer to the center of Christchurch and occurred at such a shallow depth.”

Hardest hit was the city's central business district, which remains largely shut down.

From a risk management perspective, estimating damages from this most recent event is a challenge, since the most fragile of structures were already damaged in September.

Rows of masonry buildings crumbled, and those buildings still standing will have to be carefully assessed for structural integrity, notes AIR. The city’s infrastructure also has been hard hit, with many roads and bridges damaged as a result of liquefaction. In the city’s suburbs and surrounding towns, ground failure manifested in the form of liquefaction, lateral spreading and landslides.

Insurance claims will play forward to insurers’ earnings, notes Standard & Poor’s, which issued a statement that it expects to put additional downward pressure on earnings of New Zealand general insurers, but that the capital strength and reinsurance arrangements of major insurers should protect them from earnings pressures.

Meanwhile, Marsh, which has offices at the Pyne Gould building in downtown, is focused on the wellbeing of its employees. Pacific Region Head of Marsh, John Clayton, said in a statement, “I can confirm that we have particular concerns about three of our colleagues, one of whom we believe has passed away, although we are awaiting official confirmation from the authorities. The other two colleagues remain unaccounted for. We will continue to carefully monitor the progress of the rescue effort at the site of the collapsed building. This is a very sad time for our company and many of us are in shock.”