Earlier this year, an asteroid named “2012 DA14” had been forecast to pass Earth. What was not predicted however was the meteor blast that occurred over six cities in the Chelyabinsk region in Russia’s Ural Mountains – which injured over 1,500 people and causing damage to more than 3,000 homes – costing more than RUB1 million (US$33 million).
For the insurance industry, both 2012 DA14 and Chelyabinsk bring to fore again the question of catastrophe modelling for extreme events such as meteor strikes. How crucial is it?
For this event, the region of Chelyabinsk has a population of 3.6 million and is located near the mountains – and is hardly considered an urban environment – which explains why the total sustained damages were not considered particularly catastrophic.
However in 2009, catastrophe modelling firm Risk Management Solutions, Inc (RMS) developed a modelling footprint based on the 1908 Tunguska meteor impact event. This model estimated the property and casualty impacts of a similar Tunguska event over the Manhattan Borough of New York City. From the model, property damage was estimated at approximately US$1.19 trillion, whilst fatalities and injuries were estimated at 3.2 million and 3.76 million respectively. This begs the question as to what the likelihood of such an event occurring in this day and age is.
The National Aeronautics and Space Administration (NASA) estimated that an event like the recent one in the Russian Ural Mountains could happen once every 100 years on average, whilst a Tunguska-type asteroid might enter the earth’s atmosphere every 300 years or so.
However, Mr Rade Musulin, Chief Operating Officer (APAC) at Aon Benfield Analytics Asia Pacific, noted that most of the earth is covered by water and large areas of virtually uninhabited land which makes the odds of an object the size of the 1908 Tunguska-type asteroid entering the atmosphere and hitting a highly-populated area like New York extremely low. He added that RMS did note in their study that “such event is almost impossible”, and so it was not likely to occur over a frequency typically considered in most insurance risk management frameworks.
Dr Suzanne Corona, Chief Underwriter of Asia Catastrophe Pool, Asia Capital Reinsurance Malaysia Sdn Bhd, said that relative to meteors, satellite debris is becoming more of an issue as our existing legacy satellites age. This increasing amount of “space trash” also increases the probability of impacts on the Earth, although much of the debris is expected to burn upon entry into Earth’s atmosphere.
Sufficiency of cover
In response to the Russian Ural Mountains meteor event, analysts at AIR Worldwide had stated that a comprehensive multi-peril insurance policy would generally cover meteorite damages.
According to Mr Michael Kuhn, Senior Property Underwriter at Swiss Re, although policies covering all accidental physical loss or damage unless excluded (All Risk Policies) may cover meteorite damage, these policies are normally used for commercial and industrial businesses only. And as for the sufficiency of coverage, this would depend on factors such as scope of cover, policy limits and sub-limits for specific perils.
Since meteorite risks are extreme-low frequency risks, and given that an impact on urbanised areas is quite unlikely, there may only be a low demand and willingness from those who would like to have such a cover to pay the relatively high premiums for the high intensity of the exposure, said Mr Kuhn.
Mr Musulin said that the risk of an actual loss from such a peril was quite small and that it should not be a major focus for individual policyholders as there were many other perils that were far more likely to affect their properties.
“From an insurer’s perspective, the component of damage due to celestial objects in a comprehensive collision coverage policy can be compared to the component of tsunami damage in an earthquake cover. The industry is aware that tsunami risks and the potential for loss is catastrophic, yet at the same time, it is a very low-frequency event,” said Dr Corona.
No particular need
Given the commonly-held view that this is a very low-frequency event, there is currently no meteorite insurance coverage available in the market, nor does the industry see a need to specifically develop such a cover as yet.
Dr Robert Muir-Wood, Chief Research Officer at RMS, is of the opinion that the development of such insurance is beyond the risk horizon of insurers and that at any one location, the chance of having a property damaged by a meteor is lower than one in ten million per year. Instead, intense tornadoes and rogue earthquakes are generally more likely events.
“At this time, I believe the risk of loss is sufficiently small and the peril is generally covered [so] that no such effort is needed. Obviously, if risk assessments indicate that there is greater exposure to loss of that there are gaps in coverage, the insurance market should respond and provide appropriate coverage,” said Mr Musulin.
Challenges in development
However, even if the insurance industry were to pursue the development of meteorite insurance cover, there are still challenges to be faced, such as determining risk factors, models, as well as the definition of such cover.
Saying that there is no need for the development of such a cover, Dr Corona said: “Meteorites will most often fall into the catchall cover of collision damage. These events are rare, with a high likelihood of hitting single areas, and thus pose little accumulation risk to the reinsurance market.”
She added that if asked to focus specifically on risk factors related to meteorites, she would look at the return period associated to the peril as well as the existing prevention plans in place.
Mr Musulin concurred: “There have not been significant insured losses from meteors in recent history, and as most comprehensive multi-peril insurance policies cover the loss (as do life and health policies), there does not seem to be a need for separate meteor insurance.”
However, he noted that these meteors/asteroids can strike in the ocean and trigger tsunamis – where in some cases, property policies in coastal areas may exclude coverage for this peril.
Dr Muir-Wood felt that there is quite a lot of good data on the ranges of sizes and impact velocities of asteroids by which one could develop a model, however, they do not intend to build a detailed model having already scoped the nature of the risk.
As for Swiss Re, Mr Kuhn believes that the lack of demand is a one challenge hindering the necessity of developing this cover and the inability of insurance and reinsurance markets to cover such events of low frequency and potential high intensity is the other.
Are we prepared?
Having come thus far in discussion – and supposing a Tunguska-type event were to happen – how prepared is the insurance industry in coping with the occurrence of such a catastrophe?
Preparedness would probably be low in general, because of the low demand for specific meteorite coverage, as well as the potential large accumulation exposure, according to Mr Kuhn.
Dr Corona said: “Many reinsurance companies and markets have crisis plans to cope with the swell in demand after catastrophes and that given the reinsurance industry’s track record in bearing the losses from mega catastrophes including the 2011 Tohoku earthquake, it is not unforeseeable for the industry to weather the insured losses from the modelled Tunguska-type event – although this may depend ultimately on the hit location of such a catastrophe. There will also be significant repercussions subsequently in the industry’s risk management of such perils.”
“Obviously, in the extremely unlikely case of a Tunguska-type event occurring over a major city, there would be serious economic disruption of a scale we have not seen in recorded history aside from damage in wars,” said Mr Musulin.
Dr Muir-Wood agreed that insurers are not prepared, but said neither should they need to be. “Whilst a Tunguska event over a city like New York would put a lot of insurers out of business – and the government would be forced to recapitalise insurers, as with banks in 2007/2008 – a severe financial crisis is probably more likely than an asteroid or comet hitting such an urban city,” he said.
It is noted that in the last decade alone, there have been five impact events around the globe (including the recent Russian Ural Mountains event).
Professor Peter Hoeppe, Head of Geo Risks Research Centre, Munich Re said the occurrence of the two events (DA14 and Chelyabinsk) was entirely coincidental, and did not mean that there is now a higher probability of meteorites hitting the earth. He added that Munich Re had been recording meteorite impacts since 1980 and that there had been no significant economic or insured losses as a result of meteorite impact.
Yet, despite the low likelihood of a devastating meteor impact on earth, the possibility of such a catastrophe should not be overlooked, even more so in this time and age, in which countries and businesses have become increasingly interconnected – with growing cluster risks as businesses look to outsource supply chains globally and as emerging economies develop.
One strategy to mitigate the potential huge impact of a meteorite crisis on the insurance industry as suggested by Dr Corona would be to use prevention measures implemented for other causes of catastrophic loss – such as protecting generators and other machinery with reinforced structures. While these would not prevent the loss of property located directly in the main impact zone, they could limit damage to nearby property.
“Furthermore, supply chain disruption can also be limited using the techniques applied for catastrophes in general, on which many lessons were learnt after the 2011 Tohoku earthquake and Thai floods,” she added.
If explicit meteorite impact coverage were given at all, and if its demand should increase above expectations, further strategies would include to build up sufficiently large insurance communities (for example, by obligatory insurance) and to involve the state as co-insurer or insurer of last resort, suggested Mr Kuhn.
Mr Musulin said that insurers/reinsurers should be considering a range of extreme event scenarios within their enterprise risk management framework, as well as follow the various research and studies as they evolve.
Safe for now
While the world has been fortunate thus far in terms of the relatively few occurrences of meteorite impact and their minimal damages/losses, the insurance community should not be too complacent in their consideration of the likelihood of meteorite collisions.
The sheer destructive capacity of just one of these strikes, should they occur, is a very relevant reason for discussing the possibility of creating such coverage – and hopefully before we “luck out” one day.