by Elise Linscott
The US is one of the biggest global economic powers. But it also has one of the largest property protection gaps in the world, particularly in earthquake-prone California, according to a report by insurance company
Swiss Re.
The study looked at natural catastrophe property protection gaps in worldwide markets. Although many emerging markets are considerably underinsured, by 80-100 percent in some cases, the US has a high number of underinsured properties as well.
“In absolute terms, the US, Japan and China account for the biggest chunk of the global property protection gap, with expected annual uninsured losses of more than $81 billion (more than two-thirds of the total gap of $120 billion for the sample countries) … The prominence of these three countries in absolute terms is driven not only by natural exposure, but also by population, geographic area and property values.”
Earthquake risk makes up the majority of the gap in the US, the study said. The study compared California and other high seismic risk countries with the insurance penetration last year in different markets in each country.
In California, commercial insurance penetration in 2014 for earthquakes was significantly less than in other earthquake-prone countries like Chile or New Zealand, though residential earthquake premiums were similar to other countries. But California's insurance penetration outperformed the rest in other markets; for example, property and casualty insurance penetration in California was higher than all the other earthquake-prone countries, significantly higher than Mexico, Japan and Turkey, which are also prone to earthquakes.
The study also offered some possible solutions for low insurance penetration, including regulatory support. “In Chile, the third largest property insurance market in Latin America, a favorable regulatory environment that prescribes the setting-up of equalization reserves has helped boost participation from international insurers.”
Other countries have chosen to mandate earthquake insurance, which has proved successful in covering New Zealand.
“Mandating earthquake coverage and building awareness can lead to increased insurance penetration,” the study suggested, citing a recent example out of New Zealand. When a large earthquake struck the country in 1942, New Zealand’s Earthquake Commission chose to mandate the add-on of earthquake coverage in fire policies. Now, 90 percent of New Zealand’s residential buildings are covered against earthquake, the study pointed out.
