Financial Management of Earthquake Risk Please cite this publication as: OECD (2018), Financial Management of Earthquake Risk, www.oecd.org/finance/Financial-Management-of-Earthquake-Risk.htm. This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD or of the governments of its member countries or those of the European Union. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. © OECD 2018 FOREWORD │ 5 Foreword Disasters present a broad range of human, social, financial, economic and environmental impacts, with potentially long-lasting, multi-generational effects. The financial management of these impacts is a key challenge for individuals, businesses and governments in developed and developing countries. The Financial Management of Earthquake Risk applies the lessons from the OECD’s analysis of disaster risk financing practices and the application of its guidance to the specific case of earthquakes. The report provides an overview of the approaches that economies facing various levels of earthquake risk and economic development have taken to managing the financial impacts of earthquakes. The OECD supports the development of strategies and the implementation of effective approaches for the financial management of natural and man-made disaster risks under the guidance of the OECD High-Level Advisory Board on Financial Management of Catastrophic Risks and the OECD Insurance and Private Pensions Committee. This work includes the OECD Recommendation on Disaster Risk Financing Strategies (OECD, 2017) which provides a set of high-level recommendations for designing a strategy for addressing the financial impacts of disasters on individuals, businesses and sub-national levels of governments, as well as the implications for public finances. This work has been welcomed by international fora, such as G20 Finance Ministers and Central Bank Governors and APEC Finance Ministers, who have reocgnised the importance of building financial resilience against these risks. This report was prepared by Fatih Alpaslan Yilmaz, a secondee from Turkey to the OECD, with contributions from other members of the OECD Division for Financial Affairs. It is based on responses from 31 countries to a survey questionnaire, as well as research undertaken by the OECD Secretariat. The report benefited from the support and input of the OECD High-Level Advisory Board on the Financial Management of Catastrophic Risks and the OECD Insurance and Private Pensions Committee. FINANCIAL MANAGEMENT OF EARTHQUAKE RISK © OECD 2018 TABLE OF CONTENTS │ 7 Table of contents Abbreviations and acronyms ................................................................................................................ 7 Executive summary ............................................................................................................................... 9 Chapter 1. Designing a disaster risk financing strategy for earthquake risk ................................. 13 Assessing exposure to earthquake risk .............................................................................................. 14 Supporting the effective management of the financial impacts of disasters ...................................... 15 Managing the financial impacts of disasters on public finance ......................................................... 16 Notes .................................................................................................................................................. 19 Chapter 2. The prevalence of earthquake risk .................................................................................. 21 Notes .................................................................................................................................................. 25 References .......................................................................................................................................... 25 Chapter 3. The nature of earthquake risk and trends in economic impacts .................................. 27 Occurrence of earthquakes ................................................................................................................. 28 Sources of earthquake damage ........................................................................................................... 30 Trends in the occurrence and impact of earthquake events ............................................................... 31 The economic impacts of earthquakes ............................................................................................... 34 The role of insurance in reducing economic disruption ..................................................................... 39 Notes .................................................................................................................................................. 41 References .......................................................................................................................................... 41 Chapter 4. Insurance coverage for earthquake risk ......................................................................... 45 Public insurance schemes .................................................................................................................. 49 Private insurance coverage for earthquake risk ................................................................................. 56 Underinsurance of earthquake risk .................................................................................................... 59 Notes .................................................................................................................................................. 62 References .......................................................................................................................................... 63 Chapter 5. Addressing underinsurance of earthquake risk ............................................................. 67 Improving the availability of affordable earthquake insurance ......................................................... 68 Addressing limited demand for earthquake insurance ....................................................................... 80 Notes .................................................................................................................................................. 86 References .......................................................................................................................................... 86 Chapter 6. Managing the fiscal cost of earthquakes ......................................................................... 95 The fiscal costs of earthquakes .......................................................................................................... 96 Approaches to managing earthquake-related contingent liabilities ................................................... 98 Assessing the costs and benefits of different approaches to fiscal management of earthquake risk 103 Notes ................................................................................................................................................ 104 References ........................................................................................................................................ 104 FINANCIAL MANAGEMENT OF EARTHQUAKE RISK © OECD 2018 8 │ TABLE OF CONTENTS Tables 4.1. Insurance arrangements for earthquake risk ................................................................................... 46 4.3. Co-insurance arrangements in public earthquake insurance schemes ............................................ 52 4.2. Coverage offered by public earthquake insurance schemes ........................................................... 53 5.1. Types of insurance compulsion ...................................................................................................... 84 6.1. Approaches to financing fiscal costs ............................................................................................ 101 Figures 3.1. Number of earthquakes in Oklahoma (≥ magnitude 3.0). .............................................................. 29 3.2. Number of storm, flood and earthquake events: 1960-2017 .......................................................... 32 3.3. Distribution of earthquake events across countries: 1990-2017 (%) .............................................. 32 3.4. Number of deaths and affected people from earthquake events: 1990-2017 ................................. 33 3.5. Earthquake events, deaths and affected people by income classification: 1990-2017 .................. 33 3.6. Average annual losses from earthquake events: 1973-2017........................................................... 34 3.7. Distribution of earthquake losses across countries: 1970-2017 ..................................................... 35 3.8. Earthquake damage as a share of GDP ........................................................................................... 36 3.9. The economic impact of recent earthquakes .................................................................................. 38 4.1. Trends in the share of losses that are insured by disaster type ......................................................