Despite the low probability of large earthquakes occurring in Switzerland, the risk is important to model due to its potential catastrophic impact on the region, explain Julian Alovisi and Dr Jayanta Guin.

Earthquakes in Switzerland pose a significant threat to property and the local population, despite the low frequency of large events. Although damaging earthquakes in Switzerland are relatively rare when compared to floods and windstorms, the risk is real and potentially costly. While earthquake cover is not currently included in Swiss insurance contracts on a compulsory basis, insurers are now debating whether this should change. These discussions have fuelled demand for a high quality earthquake model, and research carried out during development of such a solution by AIR Worldwide and Guy Carpenter further highlights the importance of the earthquake hazard to the insurance industry in Switzerland.

Earthquakes in Switzerland are related to the collision of the African and European plates. The country is located between areas of high seismic activity to the south, including Greece and Italy, and the relatively stable region to the north. Switzerland is divided into three main tectonic units - the Alpine Belt in the south, the Jura in the north and the Molasse basin in between (see figure 1). The terrain in Switzerland, especially in the Alpine areas, compounds the risk as it is particularly vulnerable to landslides following powerful earthquakes.

A moderate seismic risk exists in Switzerland as a result of the high population density and high property values. The country's numerous industrial premises and sophisticated infrastructure that includes dams, major communication lines, chemical plants and nuclear power plants are also vulnerable. This is compounded by the lack of preparedness due to the relative infrequency of damaging earthquakes. According to the country's Federal Office for Water and Geology, up to 90% of buildings in Switzerland have not been constructed to resist strong earthquakes.

Historical losses

The high financial loss potential makes earthquakes one of the most significant natural hazards in Switzerland. During the past 800 years, more than 10,000 earthquakes have been recorded in Switzerland. A total of 28 earthquakes with a moment magnitude of 5.5 on the Richter Scale or greater have occurred (see figure 1), the most recent in 1946. Twelve of these events caused severe damage.

The most vulnerable regions are located between Basel and the Valais. Other regions of enhanced seismic activity include central Switzerland, Graubunden canton and St Gallen. On average, 10 to 15 earthquakes are felt each year in Switzerland, and events that cause some degree of damage are expected every ten to 20 years. Destructive earthquakes with a magnitude greater than 6.5 have occurred in the past, and have a 25% probability of occurring in the next 20 years.

Despite these low exceedance probabilities, historical events show the potential for damaging earthquakes is very real and experts agree it is only a matter of time before the next one strikes. Three significant historical earthquakes in Switzerland stand out and would likely cause widespread and severe property damage were they to take place today.

The first occurred in 1356 in the region of Basel and is thought to have been the most powerful earthquake to hit the country. The earthquake is estimated to have had a magnitude of 6.9 on the Richter Scale and caused severe damage in the city from both ground motion and subsequent fires. Studies into the Basel earthquake have shown a strong correlation between the damage distribution across the city and the local soil type, as differing soil conditions can significantly amplify shaking intensity. Damage to buildings was reported to extend up to 100km (60 miles) from the epicentre. Several castles in northern Switzerland and southern Germany were also reported to have been damaged by the earthquake. If the Basel earthquake were to hit Switzerland today, it would cause extensive damage and total property losses in the country would total more than CHF20bn ($15.5bn), according to estimates produced by the AIR model.

There are more recent examples of destructive earthquakes in Switzerland. Both were centred in the canton of Valais and the first occurred in July 1855. The epicentre of this earthquake was located between Torbel and Sankt Niklaus and the magnitude was estimated at 6.4. Virtually all buildings were damaged between Visp and Sankt Niklaus and several properties were destroyed. Numerous aftershocks shook the area in the immediate aftermath of the earthquake.

The other powerful earthquake to strike Valais occurred in January 1946 and was the strongest to hit Switzerland in the 20th Century. The quake's epicentre was located in the region of Sierre and a magnitude of 6.1 was recorded. Official figures said around 3,500 buildings in Valais were damaged and some 410 chimneys were destroyed in Sierre. Four people were killed by the earthquake and numerous injuries were reported. Hundreds of aftershocks were recorded in the following months.

Modelling the risk

AIR developed its model by using a historic earthquake catalogue which dates back to 240 AD and includes more than 4,000 earthquakes with a magnitude of 3.0 and greater and more than 200 earthquakes of magnitude 5.0 and greater. Events of different magnitude and depth are therefore covered by the model, which are then simulated to illustrate how future earthquakes could affect the insurance industry. For each location within the area affected by each simulated event, local intensity is calculated as the waves propagate outward from the source of the rupture. Building characteristics are also taken into account when calculating the damage extent. Damage functions for a range of building classes based on age, height and construction materials specific to Switzerland were developed for the model, and give appropriate credit for earthquake-resistant provisions that were implemented after building codes were introduced in 1970 and standardised in the 1990s.

The model aims to provide insurers and reinsurers with a powerful resource for quantifying loss potential at a detailed level. It estimates the frequency, magnitude, and other characteristics of potential future earthquakes, including fault width and length, focal depth and rupture mechanism, using up-to-date thinking and research findings on seismology.

Insurance cover

Earthquake damage is currently not included in the obligatory elemental perils coverage provided by insurers in Switzerland and the situation at present is that the vast majority of buildings in Switzerland do not have earthquake coverage. Although some companies offer supplemental policies that provide coverage of buildings and house contents against earthquake damage, this is not mandatory in the majority of cantons and generally a higher deductible is imposed.

Natural hazards in Switzerland are usually covered as an obligatory package of perils (including flood, windstorm, landslide, falling rock, avalanche, hail and snow weight) under regular Swiss fire policies. Natural peril insurance in Switzerland aims to share the risk among the entire population through this pre-defined package, irrespective of the risk for the individual property. Therefore, the cost of cover is not location dependent which means, for example, houses on elevated land buy flood protection but to balance the situation, homeowners in flood-prone but less wind-prone areas must buy an equivalent level of wind protection. Overall, this leads to relatively low prices for protection against natural perils and ensures even high risk areas are insured across the country at a reasonable rate for the homeowner.

The earthquake risk in Switzerland differs from other perils covered by regular Swiss fire policies as it has the potential to generate more regional events. Earthquake cover is not part of the peril package, but agreement exists within the insurance industry that there is a demand for cover and the earthquake risk is fundamental. This consensus recently prompted the Federal Office for Private Insurance to open discussions with insurers in Switzerland.

Two groups playing a central role in these discussions are the Interkantonaler Ruckversicherungs-Verband (IRV) and Swiss Insurance Association (SIA). The IRV is the reinsurance buyer for the state-owned insurance companies, which provide buildings cover in 19 out of the 26 cantons and contents cover in two cantons. The SIA organises reinsurance for private companies via the elemental pool, which includes buildings and contents cover in the seven "Gustavo" cantons and contents cover in 17 further cantons. The obligatory approach to earthquake insurance currently seems to be favoured by industry leaders, but definitive decisions have not yet been made and the discussion is still ongoing.

Dr Jayanta Guin is vice president for research and modelling at AIR Worldwide. He can be reached at Julian Alovisi is part of Guy Carpenter's Instrat(R) unit and a member of its European model and development team. He can be reached at