Image: Exhibition Stadium, Newcastle 1990
December 28 marks the thirty-fifth anniversary of Australia’s most damaging earthquake. On December 28, 1989, a Mw5.4 earthquake ruptured near Newcastle, just over 62 miles (100 kilometers) from Sydney. Despite its relatively moderate magnitude, the shallow nature of the earthquake was such that it damaged 50,000 buildings and killed thirteen people.
At the time of the event, the insured loss for the Newcastle earthquake was just under AUD 1 billion (US$690 million; ICA, 2012); trending to 2022 values equates to a loss of approximately AUD 6.5 billion (~ US$4 billion). It stands as Australia’s third largest trended overall nat cat insured loss after the 1999 Eastern Sydney hailstorm and Cyclone Tracy in 1974 (ICA, 2022).
We reflected on the Newcastle earthquake in a blog five years ago and considered what could happen if a similar event scenario ruptured closer to Sydney. Rather than focus this blog on what happened in the 1989 earthquake, we want to address today’s earthquake risk landscape.
Australia has fortunately not experienced significant earthquakes in recent years, though there have been shifting market dynamics and important efforts to understand the earthquake hazard across the country that have redirected the spotlight to earthquake risk in Australia.
Market Changes Shift the Focus
Managing earthquake risk in Australia has always been important as the exposed limit for earthquake insurance is significant across the country, as cover is typically standard for home and contents insurance.
However, as Australia has witnessed large losses from weather-related perils, including flooding, bushfires, and hailstorms, the focus in recent years has been on managing risk from these more frequent perils.
A combination of notable losses from cyclones and subsequent flooding, underinsurance in the main cyclone-prone region, and rising costs of insuring cyclone-related events led to the introduction of the cyclone pool in Australia in 2022.
Large insurers were mandated to join the pool by the end of 2023, followed by smaller insurers by the end of 2024. As such, the pool effectively removes a considerable portion of the cyclone and related flood risk from the insurance market.
Where cyclone insurance historically drove insurers’ exposed limits, the introduction of the cyclone pool moves earthquake risk as the bigger concern for nationwide portfolios. For many in the Australian market, the knock-on effect of the cyclone pool is that earthquake risk now drives fundamental business decisions; including capital requirements for the 200-year solvency standards and reinsurance limits.
For a country with seismicity broadly comparable to the eastern U.S., one would not expect earthquake risk to drive the finances of Australian insurers, compared to a country such as New Zealand. Nonetheless, broader market dynamics have put the spotlight back on managing earthquake risk in Australia. And of course, there’s no way of knowing when the next big earthquake loss could occur. For those who write business across the Tasman Sea in Australia and New Zealand, it is New Zealand earthquake that is the solvency driver.
Scientific Advances Have Improved Our Understanding
The low-frequency nature of earthquakes, particularly in Australia, results in large uncertainties when assessing hazard and risk; in recent years, the Australian government has been committed to improving its understanding of earthquake hazards.
In 2018, Geoscience Australia published a comprehensive update to the National Seismic Hazard Assessment to help inform revisions to the Australian seismic design code. Last updated in 2007, the building design code is based on the 1991 hazard map; a considerably different view of seismic hazard compared to today’s understanding. As such, there is a strong need for this outdated building code to be updated.
However, the 2018 hazard assessment was not adopted by the Australian engineering community, and in 2023, Geoscience Australia published a further update that heavily involved the engineering community. It remains to be seen whether the latest National Seismic Hazard Map will be adopted into the building code.
The 1989 Newcastle earthquake highlighted the importance of stringent building codes. While damage was primarily confined to older masonry structures, newer buildings also experienced high levels of damage. One example was the Newcastle Workers Club, built just eight years before the earthquake. Its partial collapse was responsible for nine of the deaths attributed to the event.
Now 35 years ago, this earthquake did prompt a reassessment of the building code and stricter standards for earthquake resilience in Australia and continues to highlight the need to unite the latest understanding of earthquake hazard with seismic design.
Don’t Forget About Earthquake Risk
When thinking about natural perils risks in Australia, we are drawn to more frequent extreme weather perils and the impact of climate change. These events will continue to be the largest losses on insurers’ balance sheets year-on-year, posing a risk to earnings and insurance affordability in Australia.
However, the 1989 Newcastle earthquake served as a reminder that the industry must not forget about earthquake tail risk. The timing of the cyclone pool, combined with the release of the 2023 National Seismic Hazard Assessment put the spotlight back on Australia's earthquake risk.
We are investing heavily in our Australia catastrophe model roadmap; to learn more about our plans and our Australia Earthquake Model clients can contact their client success manager or sales representative.
Image credit: TorontoGuy79, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons
