Modelers Mull China Earthquake Loss Totals

The quake that hit China last week, in addition to its massive human toll, did untold property and business damage, which catastrophe modelers were finding difficult to assess for insurance loss.

Normally, the firms that make insurance loss projections are quick to follow catastrophes with estimates, but last week they were slow in coming.

Late in the week only one firm, AIR Worldwide in Boston, had put out a figure for insured loss–from $300 million to $1 billion–but it cautioned that there is a high level of uncertainty in insured loss estimates in China where the insurance market is rapidly developing and earthquake coverage is optional for both residential and commercial policies.

Kevin Long, an AIR spokesperson, said the company, which has an office in Beijing, did not expect to get a survey team into the area for several weeks.

Risk Management Solutions of Newark, Calif., said its preliminary estimate was for property losses of between $10 billion and $15 billion, which included infrastructure damage and interruption to economic activity. The firm held off any estimate of insured losses. RMS said it has been working on estimates with its scientific partners in China, the Institute of Engineering Mechanics (IEM).

According to AIR's initial estimate, uninsured property damage was in the vicinity of $20 billion. The estimate included property losses for residential, commercial/industrial and construction all risks/erection all risks (CAR/EAR) lines of business, which modelers said was one of the most impacted lines of coverage.

EQECAT in Oakland, Calif., said that economic damage from the quake probably will not exceed $75 billion. Tom Larsen, senior vice president for EQECAT, said that estimate was “really rough.”

AIR said it estimates that the percentage of buildings actually insured for quake in the vicinity of the Chengdu region is minimal for residential properties, and only marginally higher for commercial properties. While earthquake coverage is mandatory for policies covering construction projects (the CAR/EAR line of business), in many cases companies do not purchase insurance for smaller projects, AIR said.

AIR estimated that the total value of property in Chengdu, the capital of Sichuan province, exceeds $115 billion, of which only a small percent is covered by insurance. Total property value in all counties of Sichuan province affected by the quake event is estimated by AIR to be $215 billion.

EQECAT's Mr. Larsen said the biggest challenges are figuring out what fraction of the damage is insured and then determining what portion of the insured loss goes to global markets and what part is retained by Chinese companies.

Assessing the geographic spread of damage, he said that Chengdu is the biggest commercial center impacted. Ground motion there, he said, was strong to very strong, but damage is expected to be light to moderate.

“We do not expect to find significant collapses. The bulk of the commercial areas are not seeing that. They are seeing modest infrastructure damages,” he said.

However, in Dujiangyan city, 30 miles from Chengdu, 80 percent of the buildings were reported to have collapsed.

Typically the infrastructure problems for Chengdu will involve interruptions of electricity, which can take a few days to a week to repair, Mr. Larsen related.

Most of the worst impact, he said, was in a lightly populated, mountainous area. Damage to older buildings located near the epicenter was very severe, but impact on economic activity was slight, he said.

Mr. Larsen said companies with the greatest percentage of business interruption insurance would generally be those secured by joint venture capital and would not likely involve more regional kinds of commerce.

He said newer buildings within the impacted area had more engineering review, so EQECAT “would expect a lot less damage” for those.