Natural catastrophes in focus: Earthquakes

Earthquakes are among the most destructive of natural catastrophe perils. Rising urbanisation and accumulation of assets in seismic-prone areas have led to increasing exposure to earthquake hazard in many parts of the world.

Numerous major earthquakes over the past two decades, including temblors that count among the strongest ever recorded, have caused loss of life and inflicted catastrophic damage in several regions. These quakes have resulted in rebuilding and associated costs on an unprecedented scale. In addition to loss of life and injuries, the losses encompass property damage and disruption to business operations, and the consequences can be far reaching: the losses inflicted on businesses directly hit by an earthquake can ripple through industry, disrupting supply chains and the broader economy.

History demonstrates that large earthquakes have great potential to cause subsequent, related catastrophes, including destructive fires, as well as tsunamis that can pose major threats to people and infrastructure in coastal regions. In the case of the 2011 Fukushima earthquake in Japan, an earthquake caused both a tsunami and led to a major disaster at a nuclear power plant, resulting in the release of toxic and radioactive material.

The difficulty of modelling earthquake exposures makes sound risk mitigation plans critical. Earthquake risk reduction requires a multi-disciplinary approach. It cannot be restricted to improving accuracy of seismic hazard prediction but should extend to updated understanding of the exposure and vulnerability of the built environment in susceptible regions.

Improved building codes and code enforcement are two areas that have the biggest impact on reducing deaths, injuries and property losses in seismic zones.

Specific actions will vary by business but in all cases, identifying site-specific exposures and areas of vulnerability are critical. As risk knowledge evolves, it may be necessary to reconsider past planning decisions to account for risks not initially considered at the time of construction. Asset readiness, or investing in actions to reduce exposure and vulnerabilities, and hence the scale of potential losses suffered by businesses, should be the guiding principle behind such actions.

The extent of economic loss covered by insurance varies greatly based on local regulation and custom. For the 10 most expensive insured-loss earthquakes in the chart below, insured losses as a percentage of economic losses were only 21%, representing a significant uninsured sum for people, businesses and governments to bear.

As earthquake damage coverage is not always included in homeowner policies, consumer awareness about the need for a policy rider or stand-alone earthquake coverage is important to help communities recover after an event.

In addition to traditional insurance coverages, governments can consider public-private partnerships that can provide innovative solutions. These include incentivising individual purchase of insurance or government-backed programs to help whole regions recover more quickly than if coverage were absent.

Earthquakes cannot be prevented but with knowledge gained from past events, businesses and governments are now better able to take more informed risk preparedness measures. Well-developed building codes, enforcement of these codes, and risk preparedness save lives and reduce overall damages and losses.