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Sunday, January 1, 1989
Insurers quake

It somehow seems improbable that South Africa (SA) could experience a serious earthquake, but the San Andreas Fault in America forms part of the earthquake fault in SA. The line runs up from Cape Town to Durban.
All earthquakes that have been on that line have occurred in relatively sparsely populated areas, and the losses incurred have not been that great.
The most recent earthquake on the fault was the “Tulbach Ceres” in 1976, which almost destroyed the entire village. The frightening thing is that it occurred less than 100km from Cape Town.
Exposure to natural hazards has increased through an expansion of the urban areas and a greater concentration of people and property in cities. Insured values have risen dramatically in the exposed areas as well the reinsurer. So a captive can, and does, act as the insurance company; through increased industrialisation and improved standards of living.
The potential losses are enormous, mainly because buildings are not designed to withstand seismic forces. Over and above that, when an earthquake occurs the supplies of electric power, water and telephone services are interrupted. Without power and water, it is very difficult to contain a developing fire or other precarious situation caused indirectly by the earthquake. Safety standards in this respect are also generally inadequate.
The biggest dilemma facing the insurance industry is that it lacks precise data needed for dependable earthquake risk estimation. This is true not only in South Africa but, also on a worldwide scale.
Because underwriters have very little data to go on, there is the fear that they are under-pricing premiums for catastrophe cover. Sums insured are not adjusted for inflation. In addition from the moment an earthquake strikes to when buildings are repaired, there is an increase in costs due to inflation.
When asked if insurers were under-pricing their catastrophe cover, Rodney Schneeberger, chief executive of the South African Insurance Association (SAIA) replied that he felt they were.
Gareth Bradburn, AGM of Swiss Re says, “We are trying to get the market to break the country into zones to assess our exposures more accurately using the cresta system which has been universally accepted.”
Says Mr Schneeberger, “I believe that it would be advantageous to link an exercise such as this to our Special Perils Committee.” The committee is examining evidence that catastrophes are increasing in both volume and number, and are looking towards possible tightening of the underwriting of “special perils”.
Once it can be determined which areas of the country are high risk areas, then underwriters will have a guideline for costing premiums.
Interestingly, not only can earthquakes of small magnitude and duration cause extensive damage to modem buildings, but they are also more frequent than large ones. For example, a small earthquake in the capital of El Salvador on October 10 1986 had only a short duration of 15 seconds, yet damages were estimated at over $2 billion. To this must be added consequential economic losses.
Gerald Stephens, president-elect of The Society of Chartered Property and Casualty Underwriters (CPCU) says, “Potential earthquake insured losses of more than R50 billion have raised serious questions about the international insurance industry’s ability to handle such an exposure.”
In an attempt to answer these questions, CPCU has sponsored a conference on earthquake insurance strategies. The meeting is to be held in Hawaii, and delegates include insurance, financial and scientific representatives from around the world.

Copyright © Insurance Times and Investments® Vol:2.1 1st January, 1989
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