The 7.9-magnitude earthquake that recently struck China hasclaimed an estimated 15,000 lives to date and has dramaticallydisrupted the lives of many more. Although the full extent of thedamage inflicted by the quake, which made its formidable presenceon May 12, is not yet clear, Risk Management Solutions (RMS) hasassigned a preliminary price tag to the resultant property losses:between $10 billion and $15 billion.

The catastrophe expert and the Institute of EngineeringMechanics (IEM) have been working in tandem to assess the damagesince the event occurred. Their figure takes into account damage toresidential, commercial, and industrial properties. It does not,however, reflect losses related to infrastructure and interruptedeconomic activity, which carry significantly larger financialimplications.

Though concentrated in a somewhat sparsely populated area, theseismic event affected Chengdu, which is situated 90 kilometersfrom the epicenter. As China's tenth largest city by gross domesticproduct (GDP), Chengdu is home to more than 30 Fortune 500companies and 12,000 domestic organizations.

RMS notes that even though only a fraction of the property losswill impact the insurance industry, an event of this magnitude isstill likely to cause the highest insured losses in the country todate.

“Insurance penetration varies significantly by line of business,ranging from negligible for residential property to more than 50percent for high-end commercial buildings in Chengdu and fullcoverage for the industrial facilities owned by multinationalbusinesses,” the company said.

China's central region, where many companies have movedoperations because of cheap labor and low property costs, isparticularly vulnerable to seismic activity, as is much of thecountry. However, Domenico del Re, senior model manager at RMS,urged insurers and reinsurers to not overreact and directed thefocus to weighing the ramifications of disrupted operations,especially as they pertain to manufacturing.

“This event does not signify that earthquake risk is uninsurablein China,” he said. “Tools are readily available for insurers andreinsurers to price and manage the risks effectively. Businesscontinuity will be a fundamental issue, as the affected areas areburgeoning manufacturing zones. “Some companies have alreadyreported disruptions to operations, which could have seriousramifications no only for the companies themselves but also forthose downstream in the supply chain.”

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