Protection Gap

The seismic impact on the protection gap: Five years after the Gorkha Earthquake in Nepal

Goran Trendafiloski

Head of Earthquake Model Development (EMEA, APAC) at Aon’s Impact Forecasting team

Nepal has experienced several large magnitude earthquakes due to the active seismicity of the Himalayan region. In 2015, the M7.8 Gorkha earthquake devastated Nepal causing more than USD175 million insured losses – but this was a fraction of the economic losses that reached USD5.1 billion. This highlights the need to better evaluate the seismic risk and enable insurers to offer more coverage in the country, supported by the development of a new catastrophe model from Aon’s Impact Forecasting team. Five years on, we recap on the event, explore lessons learnt and reveal how Aon’s new catastrophe model can support in the future.

Event seismological recap – the seismic gap still open

On April 25, 2015, a magnitude M7.8 earthquake struck the Kathmandu region of Nepal. This was the strongest to occur since the 1934 M8.0 Nepal-Bihar earthquake. The epicentre of the earthquake was 77 km northwest of Kathmandu, the capital city of Nepal, at a depth of about 15 km. The earthquake occurred at the subduction interface along the Himalayan arc between the Indian plate and the Eurasian plate. In the following days numerous aftershocks were felt across Nepal, including additional M7.3 and M6.7 earthquakes on May 12, 2015. These aftershocks caused additional damage to rural towns and villages in the northern part of Central Nepal.

Epicentral location of the M7.8 Gorkha earthquake that occurred on 24th April 2015 along with the aftershock sequence up to 1 year shown with the regional tectonic features of the Himalayan region. Inset shows an enlarged view with the finite fault features in grayscale

Neither the location nor the magnitude of the event (including an estimated return period of 130 to 150 years) was a surprise to the scientific community. Scientists had long been forecasting a potential major earthquake occurring in the hypothesized ‘seismic central gap’ in Nepal. A seismic central gap with a potential length between 500 to 800 km is defined as un-ruptured part of the Himalayan arc. Although there have been few earthquakes in the gap, their magnitudes were less than M7.0. During the Gorkha earthquake, the eastern segment of the gap largely ruptured about 250 km and the unbroken part of the western segment continues to have the potential of a major earthquake with a magnitude up to M8.5.

Hazard exposure in terms of the intensity distribution of the mainshock event across the region shown along with the Himalayan Frontal Thrust

Read more details in Impact Forecasting's 2015 Nepal Earthquake Event Recap Report.

Direct and indirect economic losses

The earthquake sequence of 2015 resulted in far-reaching consequences for Nepal’s economy and population. These impacts were not just felt in real-time, as effects remain profound even five years after occurrence. The fiscal costs were not only the result of the catastrophic nature of the event itself, but also exposed the severe lack of much needed resiliency across the fundamentals of Nepal’s societal norms and infrastructure.

The direct humanitarian and physical damage was substantial and the most prolific in the modern record for the country. Official governmental documents (Post Disaster Needs Assessment, 2015) list 8,970 fatalities and 23,000 injured. As many as eight million people in Nepal were affected in total. The overall economic cost equalled a sizeable portion of the nation’s Gross Domestic Product (GDP).

The extensive costs associated with the physical damage and prolonged business interruption resulted in long-lasting effects that impacted nearly every sector of Nepal’s economy. Even five years later, some segments have yet to fully recover and achieve fiscal benchmarks in place prior to the earthquake sequence. From the macroeconomic perspective, the slowdown of Nepal’s steady economic growth was directly linked to the 2015 event: economic growth in 2015 was at its lowest since 2002; growth levels in 2016 plunged to 0.6 percent. Despite initially declaring ambitious reconstruction plans, the revitalization of Nepal’s building stock was far slower than initially expected. The full economic value of the reconstruction need was initially calculated at USD6.7 billion, but later revised to USD8.4 billion.

Shortly after the earthquake, the National Reconstruction Authority was established in hopes to manage, oversee and coordinate the reconstruction work. Several years after the earthquake, some initial ‘lessons learned’ are already visible and an important step was making the earthquake insurance compulsory with fire insurance which was optional before. The primary insurance rates increased which helped the insurance companies to pay up the claims faster along with the help of reinsurers. Overall, the Nepalese market has seen considerable growth over the last five years with non-life market premiums doubling from NPR11.43 billion in 2015/16 to NPR24.33 billion in 2019/20.

Exploring the protection gap

The most recent decade (2010-2019) highlighted the significant protection gap that persists in developing and emerging countries. The protection gap is the portion of economic damage not covered by insurance. According to Aon’s Catastrophe Insight natural disaster database, no part of the world was more vulnerable to this topic than in Asia, where just 12 percent of economic losses – USD152 billion out of USD1.24 trillion – were covered by insurance. This means that, in most major disaster events, virtually all losses are uninsured and local populations are entirely dependent on financial support from the federal government or international aid agencies for recovery.

The earthquake peril has traditionally suffered from severe underinsurance on a global scale including in the mature insurance markets like the United States and Japan, which have historically endured costly and impactful events with a large protection gap in the aftermath. In California alone, just 10 percent of homeowners have earthquake insurance. This suggests that a major event could result in considerable uninsured costs. This was even more prevalent in Nepal after the 2015 earthquake sequence. Despite the economic cost surpassing USD7 billion from the event, the Nepal Insurance Board cited that only USD170 million – or roughly two percent – of that total was insured following 17,564 paid claims. Most of that was covered by international reinsurers.

How can the re/insurance industry help close the protection gap in Nepal?

To help re/insurers better evaluate the seismic risk and offer more coverage, Aon’s Impact Forecasting team is developing a probabilistic and scenario catastrophe model for Nepal to incorporate the latest scientific findings.

The model is due for release later in 2020 and aims to deliver:

  • Hazard insights based on 100,000+ stochastic events that are consistent with regional earthquake occurrence patterns and considering magnitude potential of seismic gap
  • Representation of different risks including occupancy and construction classes plus secondary vulnerability modifiers such as age of construction and number of storeys
  • Ability to analyze portfolios with residential, commercial and industrial lines of business at various geocoding levels

The industry is well-positioned to help governments and humanitarian organizations around the world by providing solutions that build resilience before events and ensure faster recoveries, while removing financial burdens for the public sector and charities.

Exploring the insights from Nepal enables the re/insurance industry to identify ways of supporting governments, businesses and communities not just in this country but around the world as collaborate to close the protection gap.

Learn more on how the re/insurance industry is collaborating with government to close the protection gap.

About the Author

Goran Trendafiloski heads the earthquake model development at Aon’s Impact Forecasting team for EMEA and APAC.His principal fields of expertise include: (1) probabilistic and scenario property and life seismic risk assessment; (2) catastrophe model development and modelling (emergency and non-emergency mode); (3) delivering bespoke model solution for clients by including their view of risk; (4) collaboration with scientific institutions to translate the cutting-edge knowledge into practical solutions for the industry. He is especially passionate in dealing with secondary and non-modelled earthquake perils. He was previously at the World Agency for Planetary Monitoring and Earthquake Risk Reduction in Geneva, Switzerland. Goran holds Dr.Tech.Sci. and M.Sc. degrees from the University St. Cyril and Methodius, Macedonia and postgraduate specialty degree from the University of Geneva, Switzerland.

Contributors include Steve Bowen, Michal Lörinc, Himavant MuluguPrabhu Muthuganeisan and Dinesh P. S. Poudyalaya

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