Will Insurance Cover Haiti's Losses? Sorry, Bad News.
Sixteen years ago this week, the world’s eyes were on the Los Angeles, California region. The devastating January 17,1994 Northridge magnitude 6.7 earthquake had just killed 57 people, injured 10,000 others, put seven freeways out of commission, and damaged or destroyed hundreds of buildings, including a large wood-frame apartment building that collapsed and killed 16 occupants.
Estimated damage in dollars was about $25 billion – and until the destruction of New Orleans, it was the most costly disaster in U.S. history, in terms of dollar loss. Eleven hospitals suffered structural damage and were largely unusable; real estate values temporarily dipped; freeway damage caused transportation interruptions and delays; the US Postal Service stopped delivering mail for several days; many schools and universities suspended operations; and communications, including radio and TV, were briefly interrupted. But the greatest impact occurred when insurance companies paid out an unprecedented number of damage claims. Costs continue to rise as more damage is uncovered, repairs are made, and disaster-related claims are paid out.
Northridge was an unexpected blow to the insurance industry, and in the aftermath, most insurers either stopped offering earthquake insurance, or restricted its availability. To respond to the crisis, the California Legislature created the California Earthquake Authority (CEA), which is a publicly managed but privately funded organization that offers minimal coverage.
Fast forward: January 12, 2010. The Haiti earthquake pretty much leveled Port au Prince and its surrounding villages and communities. No one really knows yet how many people have died, because rescue and recovery operations are still underway, but the death toll is currently estimated to be between 100,000 – 200,000. It is a disaster of epic proportions, with tens of millions of dollars in support flowing from all over the world to responding agencies on the ground. Early estimates by the World Bank indicate that this disaster will cost Haiti a minimum 15% of its GNP ($6.5 billion in 2008).
In sharp contrast to Northridge, which rocked the insurance world, the Haiti earthquake’s impact on insurance stocks is so negligible it’s hardly worth mentioning. Insured losses for catastrophes such as Haiti’s recent earthquake normally reach into the billions of dollars in more heavily-insured areas. In 2005, for example, Hurricane Katrina led to more than $40 billion of claims, making it the industry's most costly natural disaster. And the attack on New York's World Trade Center in September 2001 cost insurers up to $60 billion.
The awful truth is, insurance companies do little or no business in developing countries – and Haiti is the poorest country in the Western Hemisphere. Insurance policies there represent only about 0.28% of the country’s GNP. In other words, the majority of Haiti’s population had no coverage, and payouts to Haitians by the largest insurers are expected to come in at or below a paltry $40 million.
While that’s good news for the insurance industry, it’s bad news for the victims in Haiti.
- Thomson Reuters Insurance Linked Communities
- Wikipedia – The Northridge Earthquake
- Public Roads, article by Ian Buckle
- Journal of Contingencies and Crisis Management, article by Kathleen Tierney
- Bloomberg.com, Haiti Earthquake to Cost Economy at Least 15% of GDP (Update2)
- Reuters, Much of Haiti Damage Not Insured
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John Rundle is a Distinguished Professor of Physics and Geology at UC Davis and the Executive Director of the APEC Collaboration for Earthquake Simulations. He chaired the Board of Advisors for the Southern California Earthquake Center from 1994 to 1996. Read John's blog.