Earthquake risk deserves to be insured

Earthquake insurance is a form of property insurance that guarantees compensation to the insured, if the property gets damaged as a result of earthquake. The earthquake on April 25 in Nepal, known as the Gorkha earthquake, has once again underlined the importance of options like earthquake insurance as a measure of preparedness for protection of properties.

The findings from several seismic-tectonic studies show that during the nineteenth and twentieth centuries the north-eastern part of India and Bangladesh experienced some earthquakes, for which the area has seismically been identified as the active region in Asia (Figure 1).

Bangladesh has developed seismic zoning dividing the country into three zones. Zone-3 is the most and zone-1, the least vulnerable to quake risks (Figure 1).

Figure 2: Major earthquakes in Bangladesh

The earthquake insurance covers the risk of landslide, settlement, mudflow, contraction or loss of land etc. It also includes the collapse of and cracks in any building.

It is alarming to note that the Nepal earthquake spread through a wider area including the territory of Bangladesh. At least three people died and some buildings developed cracks while others tilted even in the capital city.

However, the quake affect could be much more devastating for our country, for which we are in no way prepared. No risk management approaches are here in place. Owners should be careful about the extent of havoc an earthquake can play with their properties.

Most of homeowners opt for only fire insurance, which specifically excludes the risk coverage for earthquake. Without having such additional coverage, no claim can be made under the fire insurance policy in the event of any earthquake. Above all, earthquake insurance, being one of the means of covering these risks, is little known in our country.

As insurance practitioners we witnessed a spike in enquiries about earthquake insurance in the past few weeks. The few household owners, particularly those who have mortgaged loans, have been one step ahead by purchasing earthquake insurance following the devastation in Nepal.

In the National Plan for Disaster Management for 2010-2015 developed by the Ministry of Disasters and Relief, there is a provision for exploring insurance options for proper coverage of risks in an earthquake.

Major cities of our country lie within the seismic zone. The risk management experts suggest that property owners in the seismic zones, i.e. areas vulnerable to earthquake, should have the required level of insurance protection.

It is the market practice that the banks and/or financial institutions require insurance coverage along with inclusion of Agreed Bank Clause or the Mortgage Clause in the policy in question for sanctioning loans. The clause protects the interests of the financier in that property.

Moreover, for getting indemnification in the event of damage to the property resulting from any earthquake, the financier or the insured has to make sure that the insurance policy specifically covers the risk of earthquake.

When it comes to the premium rates, it is time to adjust the tariff rate (devised a decade back) with the changing conditions in the insurance and global reinsurance markets.

 As a matter of preparedness, the earthquake risk deserves to be insured. For this end, the earthquake premium rate of 0.18 per cent charged on the total insured value can be lowered based upon the particular geographical location of the risk with a view to making the earthquake insurance affordable.

For insuring tens of hundreds of properties against any earthquake, an insurance company itself requires insurance protection i.e. reinsurance placement to reinsurers. All parties involved in this circle are recommended to have sufficient insurance coverage, because the financial impact of any earthquake can be catastrophic.

Without placement of earthquake business to reinsurers, insurers can become insolvent due to the catastrophic nature of the risks. Therefore, the state-owned Shadharan Bima Corporation, the only reinsurer in Bangladesh, should monitor the adequacy of reinsurance protection of the insurance companies in the event of any earthquake.

To address the national issues pertaining to natural disasters including earthquake, all concerned have to make people aware about the basic disaster management activities, including sensitising the people about seizing the insurance mechanism, since it is nothing but a way of sharing or distributing the risks among a wider community in the event of a disaster-man-made or natural.

The writing was first published in 2015 in The Financial Express Bangladesh.

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