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Insurance covers only a fraction of Nepal's earthquake damage

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The devastating magnitude 7.8 earthquake that struck Nepal, killing at least 7,500 people and causing widespread destruction, highlights the quake-prone nation's lack of disaster preparedness and limited insurance coverage to mitigate losses.

The April 25 quake occurred at an estimated depth of 10 kilometers (6.2 miles), “making this a shallow and therefore extremely destructive event,” according to Boston-based catastrophe modeling firm AIR Worldwide.

Most of Nepal's population lives in unreinforced masonry buildings “that are highly vulnerable to earthquake ground shaking,” California-based catastrophe modeler Risk Management Solutions Inc. said in an analysis.

Although it is too early to fully assess losses caused by the quake, which was followed by dozens of aftershocks and caused deaths as far away as Bangladesh, India and Tibet, direct economic losses could be in the range of $3 billion to $3.5 billion, according to the Center for Disaster Management and Risk reduction Technology at the Karls-ruhe Institute of Technology in Germany.

Economic losses could top $5 billion — about one-quarter of Nepal's gross domestic product, according to Impact Forecasting, a unit of Aon Benfield in London.

But insurance is likely to cover only a fraction of that, experts say.

Total insurance penetration in Nepal was just 1.4% of its gross domestic product and property/ casualty insurance penetration was just 0.5% in 2012, with per capita insurance spending of $9.08, according to Axco Insurance Information Services in London.

State-owned Mumbai-based General Insurance Corp. of India, the largest reinsurer in Nepal, said its maximum loss from the disaster would be about $160 million.

“We have done the business of reinsurance with 13 Nepalese nonlife companies and account for about a quarter of the total insurance in the country,” A.K. Roy, chairman of GIC Re, said in a statement. “We are expecting claims from segments like power plants, housing, building and hotels.”

Several Indian public-sector insurers, which also are reinsured by GIC Re, have some exposure to Nepal and likely will face claims, experts said.

“While the level of damage and casualties was enormous, the seismological magnitude of the event in the Indo Nepal region was not unexpected,” said Adityam Krovvidi, head of Impact Forecasting for Asia Pacific in Singapore.

Scientists have warned there could be major quakes caused by the “central seismic gap” that has existed in the Himalayan fault system since the magnitude 8.0 Nepal-Bihar earthquake in 1934 that killed up to 12,000 people, he said.

“Unfortunately, for the earthquake peril, timing is always the greatest unknown factor,” he said. “The vulnerability of buildings and structures in Nepal posed a significant risk given the absence of good seismic code history and implementation practice.”

“A new disaster management act has not yet been implemented because of ... political stalemate and lack of government process,” Axco said in its analysis.

The earthquake underlines the fact that disaster preparedness and insurance penetration are “woefully low” in Nepal, said Julian Roberts, co-head of Willis Group Holdings P.L.C.'s global weather risks practice in London.

“We'll probably find that there was more insurance carried by the tourists and expat community out there than all the Nepalese combined,” he said.