The Day After


The Day After
November 1, 1755:
"In the year of Our Lord 1755, on the first day of November, a Saturday, almost ten of the clock, the sky unperturbed and the ocean stilled, here came a deep awful rumble with the tremor: The land where Lisbon sits was atremble, and in no time shook this way and that. At first the quake was negligible. Yet it grew and it grew; first went the cracking roof beams and floors, then the stucco came undone; with great commotion arches, walls and towers collapsed...”

Thus Father António de Figueiredo describes the catastrophe that befell the city and other parts of the country in his written comment on the earthquake and fire that laid waste to Lisbon. Estimates point to a number of deaths from 15,000 to 70,000. Father António later points out that, soon after the quake, "the generosity and munificence of our most merciful monarch had nuns lodged in secluded locations, had ruined monasteries repaired, and set help in the form of diverse timbers, trusses and money (...) sending for soldiers to clear the streets and alleys and topple the remaining walls of broken houses (...).” Of the 20,000 houses then extant in Lisbon, only 3,000 were fit for habitation after the quake. 32 churches, 60 chapels, 31 monasteries, 15 convents and 53 palaces were razed to the ground or damaged beyond repair. 

November 22, 2007:
"According to the information available, a violent explosion took place around 6.45 PM at a residential building in the Alfonso Paiva Square, Setúbal. The top three floors were completely destroyed and the entire building sustained damage. The explosion caused three wounded in critical condition and injured another 37. Over the following 6 months, the building underwent structural containment work and was assessed by experts to determine whether the building is still amenable to reconstruction. 

Faced with the need to speed up coordination of personnel, materiel and financial resources to recover the estate, insurers set aside the proportional rule as they had encountered a situation dominated by infrainsurance, namely where the recovery of the common parts of the building were concerned.” (Luso-Roux report.) 

The connection between these two events — granted, they are dissimilar in scope and consequence — is that disasters affecting people and property can and will happen. The question is, are we ready to face the day after? Reconstruction, be it twenty thousand homes, or just one? 

You could argue that the munificence of monarchs that send assistance, or the generosity of insurers that provide indemnity without regard to proportion, are ever-present means of salvation, at least in Portugal. However, the Setúbal case clearly demonstrates that financial resources are not always allocated in the best possible manner when it comes to day-after reconstruction, and that these resources could be spread too thin. Under the current horizontal property system, the sum total of insured capitals pertaining to fractions is insufficient to cover reconstruction costs for the common parts of damaged buildings, whether the cause is an isolated explosion or a massive earthquake.

Hence the particular relevance of modelling and securitizing catastrophic risk as priorities in the insurance market, whatever your perspective may be: As an insurer who must rely on reinsurer capabilities; as an agent drawing on pooled resources or financial reinsurance facilities, or alternative solutions not necessarily limited to the reinsurance market. Indeed there should be more than one way to resolve claims derived from extraordinary events where traditional insurance packages prove inadequate to day-after needs. 

Nearly every European country has its own catastrophic risk model. Only a few implement mandatory coverage of certain risks. Others preserve optional solutions, such as the US and Japan. In Spain, there is a "Consorcio de Compensación de Seguros” (Insurance Compensation Consortium), which deals with seismic phenomena. It is a staterun organization operating under the same legal framework as private insurers and relies on limitless financial collateral from the State whenever financial resources prove insufficient. 

In France, property insurance must include coverage of seismic phenomena. There is a framework for state compensation: The "Caisse Centrale de Reassurance” is empowered to provide unlimited coverage. 

Belgium implements mandatory "natural disaster” coverage in its optional fire hazard policies, and there is a national calamity fund, established in 1976, set to intervene whenever certain indemnity levels are overrun. 

In Norway, fire hazard policies must cover seismic phenomena. The national Norwegian fund for relief of natural damage was created in 1961 to compensate for natural hazards. 
In Turkey, seismic phenomena must be covered through the Turkish mandatory insurance pool, a state-run organization which manages risk mostly through international reinsurance. 

Germany implemented an "insurance extension to damage from natural phenomena” in 1991. The available coverage presents several options to cover, among other hazards, seismic phenomena. 

The US do not, as a rule, favour mandatory coverage, except in California, where insurers are legally compelled to offer earthquake coverage to anyone who takes out insurance on real estate. There is a state assistance scheme through a reinsurance mechanism made available by the California Earthquake Authority. 

Japan does not implement mandatory earthquake coverage. Parliament has ruled on a maximum compensation amount pertaining to property insurance. The Japan Earthquake Reinsurance Co. was created in 1996 by all non-life insurers and it is this organization which, through reinsurance mechanisms, shares the burden of risk with the Japanese state. 

In New Zealand, earthquake coverage has been mandatory since 1994 and all homeowners must be insured. There is a state earthquake commission which acts through a disaster response programme to attenuate and deal with the consequences of geological disasters. 

Finally, in Portugal, the government was expected to consider a catastrophe fund over 2003/2004, to be implemented in 2007. It would initially be sustained by the State and afterwards financed by a levy on multi-risk property policy insurers. This fund would be an extra resource pool derived from insurers’ business to face day-after reconstruction... because there may well be a day after.


The 1755 quake fired the imagination of illustrators and engravers, who painted dire pictures of desolation, On that tragic Saturday, November 1, people were celebrating All Hallows. The first tremor came at 9.30 in the morning. Two others ensued and lasted a while longer. It is estimated that the quake reached 8.7 on the Richter scale. Most buildings in Lisbon could not withstand such force. Downtown Lisbon crumbled. The Santa Maria cathedral and the Opera house, jewels on the city's crown, were lost forever. A massive wave engulfed seagoing vessels and flooded the lower parts of town. After the water came fire. Accidents and arson brought about a blanket of fire that swept the ruined city, turning it into a hell-pit that would take days to cool down and put out. Thousands were left homeless. It is estimated that ten to thirty thousand people died in the catastrophe. However, some sources claim the death toll had reached 90,000. Reconstruction of the city is spearheaded by the Marquess of Pombal, Minister to king D. José, and it is based on an orthogonal plan. The minister also prepared a survey which he sent out to parish priests all over the country, to ascertain causes and effects of the quake. The survey included questions such as "Did you notice anything unusual about the ocean, wellsprings or river? Did the tide ebb first, or did it flow? Did the Earth open up anywhere, and if it did open any troughs, what else did you notice? Have any new wellsprings gushed forth? Were there fires? If so, for how long? How much damage did they cause?” Priests were given a month to return their answers and asked to gather evidence from "intelligent” parishioners to clarify "doubts.” This attempt to try and frame the quake scientifically is the reason why the Marquess of Pombal is named as a forerunner of seismology in Portugal.

By Pedro Castro Caldas, Risk Management Consultant

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