Ethiopia’s Seismic Threat

An Opportunity for a New Insurance Solution?

Earthquakes, often regarded through the lens of traditions and beliefs as a divine punishment, rank among the most frightening natural disasters due to their destruction capacity and inherently unpredictable nature.

Geoscientists emphasize that Ethiopia’s diverse regions experience varying levels of seismic activity due to their location along the African Great Rift Valley region and tectonic plates. This underscores the urgent need for earthquake preparedness, as earthquakes have been a longstanding reality in Ethiopia, with numerous perceptible tremors occurring.

Recently, on the evening of October 6, 2024, an earthquake struck the Awash Fentale district and surrounding areas, creating a sense of alarm among the local population and possibly resulting in structural harm to residences and ground fissures. The seismic event, which measured 4.9 on the Richter scale, occurred at 8:10 PM and was perceptible in distant locations such as Addis Ababa. This led to damage to various buildings and the formation of cracks in the earth within the affected regions; however, there have been no definitive reports of injuries or significant damage stemming from the earthquake.

Given the country’s geographical position and the potential impact of earthquakes in significant cities, it’s crucial to consider ongoing measures to reduce these risks. The possibility of future earthquakes underscores the need for continuous preparedness and vigilance.

Historically, the nation has endured far more catastrophic natural and human-induced events, such as droughts, famines, and conflicts, which have led to a perception that other disasters, including earthquakes, are less probable and possibly less destructive.

Many regions susceptible to seismic activity have only recently experienced significant population growth, and there has been no historical record of a major earthquake threat in the nation over the past 30 to 50 years. This lack of precedent may lead individuals to overlook earthquakes as a natural disaster that has caused considerable disruption within the country.

Nevertheless, in opposition to the aforementioned arguments, I contend, as a professional in the insurance sector, that the nation requires effective risk mitigation strategies at multiple levels and layers, including providing earthquake insurance.

The Ethiopian Record:

Despite the nation’s initial earthquake design code in 1983, the country has historically undervalued the implementation of seismic-resistant codes, often citing economic concerns. However, the urgent need for improved building codes is clear, as the costs of repairing earthquake damage can far exceed preventive measures, especially given limited resources.

Earthquakes severely impact numerous regions nationwide, and major metropolitan areas in high-risk zones constantly fear impending disasters. Until recent years, the insurance industry has exhibited a notable hesitance regarding natural disasters. This reluctance may be attributed to the fact that earthquakes frequently affect large numbers of low-income individuals. In many developing nations, it is typically the governments that assume responsibility for claims and reconstruction expenses. Insurers have been particularly cautious about covering earthquake-related risks due to the extensive damage that earthquakes can inflict. Even in developed countries, earthquake insurance is seldom mandatory and is generally available only as an optional add-on to homeowners’ insurance policies.

Here, it is essential to emphasize that a significant portion of the buildings in Ethiopia are vulnerable. Over the past five decades, Ethiopia has experienced a substantial rise in urbanization, driven by population growth. A notable increase in the construction of high-rise buildings, residential homes, educational institutions, bridges, water supply systems, and other essential infrastructure has parallelled this surge in urban residents. Consequently, the proximity of these critical structures to significant population hubs such as Addis Ababa, Awassa, and Nazret raises concerns regarding the potential damage they may incur from substantial seismic events. Many buildings in these urban areas, similar to those in numerous developing nations, were not constructed per stringent earthquake-resistant design standards, which could lead to severe damage ranging from complete collapse to structural failures that render them uninhabitable.

With the rise in urbanization and the prevalence of substandard construction practices, the need for insurance cover as an additional protection layer for Ethiopia becomes even more critical. It’s time to bridge these gaps and ensure the country’s safety.

In a nutshell, what are the specific coverages of earthquake insurance?

The specific provisions may differ from one policy to another; however, earthquake insurance typically provides financial protection against damages from seismic events, as standard homeowners policies typically exclude this coverage. There are two main types: traditional earthquake insurance, which requires claims to be submitted and evaluated for payouts, and parametric earthquake insurance, which pays based on predetermined criteria, such as earthquake magnitude, rather than specific losses. While parametric insurance allows quicker payouts, it may not fully cover significant damages. Earthquake insurance protects residential properties and personal possessions, plus the cost of temporary living arrangements in the event of damage or destruction caused by an earthquake.

It is essential to recognize that earthquakes’ potential for catastrophic destruction renders them intriguing and enigmatic, particularly given the lack of reliable methods for predicting their occurrence. Furthermore, in addition to the significant earthquakes that garner international attention, numerous minor, undocumented seismic events remain unreported and can lead to various losses.

In addition, in nations such as Ethiopia, where adequate risk data and mitigation strategies for earthquake hazards are lacking due to the absence of catastrophic modelling (CAT Models), obtaining insurance coverage can be challenging but serves as a significant solution. Catastrophe modelling is used to assess the potential losses due to the earthquake. Safeguarding the nation and its populace from substantial catastrophic risks, including earthquakes, should be a priority for insurance companies.

As reports indicate, earthquake risk levels vary across the country and regions. The country must establish natural catastrophic risk pools for significant hazardous risks. The government must put more effort into increasing social protection measures for the lower-risk areas. In addition to the government’s initiatives, the insurance industry and insurance companies should develop distinct earthquake property insurance and earthquake life insurance products. These offerings should be available separately and in packages, catering to the diverse needs and capacities of the insured.

The aftermath of earthquakes results in enduring social, environmental, and economic challenges. Consequently, enhancing the strategies and techniques employed in responding to seismic occurrences is essential to minimize the damage associated with each event. Significantly, there is a pressing necessity to advance mitigation strategies to lessen the effects of earthquakes and other seismic activities on infrastructure. Such improvements would preserve lives and diminish the economic losses experienced during these incidents, with insurance as the most effective means to address the protection gap.

A glimpse of practical lessons

A global assessment by Munich Re Group reveals that natural disasters in the first half of 2024 caused economic losses of $120 billion, with over half ($62 billion) affecting the insurance sector. Several countries that have effectively learned from their challenges include the United States, Japan, Morocco, and Turkey, to name a few. The disasters resulted in 4,500 fatalities, including significant losses in Morocco from a February earthquake following the Boumerdes earthquake in Algeria. In Turkey, insured losses from the Kahramanmaras earthquake are estimated at 116.9 billion TRY (about $6.2 billion). This earthquake, which struck on February 6, 2023, resulted in around 62,000 deaths and displaced nearly 3 million people. Japan, experiencing about 1,500 tremors annually, processed 103,439 claims, totalling 91 billion JPY (approximately $579.8 million) as of May 31, 2024, with more claims expected.

What should be done as a Panacea?

Globally, including in the notable East African Rift Valley region, concerns regarding “the Big One” persistently linger in public consciousness. However, the percentage of insured properties and lives needs to be higher. This situation creates a paradox in the development of earthquake insurance, suggesting an illusion of risk management, but recent seismic events should act as a driving force for creating more robust insurance programs.

Earthquake insurance for homeowners is designed to protect residential properties and personal belongings. It must be associated with a fire insurance policy and cannot be issued independently. Premium rates can be determined based on geographical location and building type. The responsibilities of reinsurance can also be divided between governmental and private entities. Furthermore, foreign reinsurers can contribute to various systems, while the private sector addresses commercial and industrial risks through endorsements on fire policies. Some insurers have ceased to offer earthquake coverage due to concerns about potential financial instability resulting from major earthquakes. However, insurance companies have reacted in specific regions and situations by increasing policy premiums or establishing a shared pool for earthquake-related risks. Nonetheless, it is equally crucial for the government to enforce mandatory initiatives, such as creating the Ethiopian Catastrophic Insurance Pool, to tackle earthquakes and other catastrophic risks.

Earthquakes are an inevitable reality in our region, and the major cities within the country face a credible risk of significant seismic activity. Consequently, the potential for loss of life and extensive damage cannot be overlooked. Furthermore, considering the nation’s current economic challenges, it may need more resources to manage catastrophic losses effectively. Therefore, it is crucial that all key stakeholders, including various levels of government, collaborate to develop a comprehensive contingency plan to address these imminent natural disasters, including earthquake insurance, in mitigating these risks. The earthquake insurance should also be supported by catastrophe modelling, which involves using computer-based calculations to assess the potential losses that may occur due to a catastrophic event, such as an earthquake. Moreover, while it may be tempting for ordinary citizens to dismiss earthquake insurance as an unnecessary cost, the unpredictable nature of major earthquakes necessitates its consideration, especially in the absence of a national emergency fund or catastrophic pools.

13th Year • November 2024 • No. 135