When looking at photos of a destroyed San Francisco in 1906, thequestion inevitably arises as to whether the insurance industry isfinancially capable of surviving a similar earthquake in today'sBay Area.

|

A quake equal to 1906's 7.9-to-8.3 magnitude striking the SanFrancisco Bay Area today could cause over $200 billion inlosses–with as much as $60 billion of that insured, according to areport by Swiss Re.

|

An even higher assessment was delivered by AIR Worldwide Corp.,a risk modeling firm based in Boston, which said a recurrence ofthe 1906 San Francisco earthquake would result in almost $80billion of insured property losses, based on total property lossesexceeding $300 billion.

|

“If the recurrence were to happen during working hours, AIRestimates approximately $7 billion in workers' compensationlosses,” added the firm, estimating as many as 5,000 fatalities andmore than 50,000 injured.

|

“San Francisco is one of the most vulnerable parts of thecountry,” said Loretta Worters, vice president of communications atthe Insurance Information Institute in New York. She noted thatmuch of the city's building stock is older and built onlandfill.

|

Although much has been done since 1906 to help mitigate thethreat of an earthquake, the city still has a “pretty fragileinfrastructure” and concentrated areas of business, she said.

|

The state of California ranks as approximately thefourth-largest economy in the world, while the San Francisco Bayarea's “Silicon Valley” would by itself stand in the top 20, notedAndre Castaldi, a senior vice president heading up the catastropheperils team at Swiss Re America and one of the authors of a reporton the quake.

|

Representatives at Fireman's Fund and Lloyd's of London, as wellas Mr. Castaldi at Swiss Re, expressed confidence that theirorganizations have adequately modeled their potential exposure to asevere earthquake in San Francisco and that they would be able topay all legitimate claims.

|

“It would be irresponsible if we didn't,” said Chris Heidrich,vice president of marketing for personal insurance at Fireman'sFund, based in Novato, a suburb of San Francisco.

|

Thor Valdmanis, vice president of communications for Lloyd's inNew York, said his market runs “realistic disaster scenarios.”Although he would not disclose the exact exposure Lloyd's faces,its participating syndicates would pay their claims just as theydid after the 1906 earthquake. “We're in the insurance business.It's what we do,” he said.

|

Perhaps the larger concern, however, is not the industry'sability to pay claims, but the people who would be making them.

|

The take-up rate for earthquake coverage in California stands atapproximately 13 percent of residential consumers, according to Ms.Worters–down from 30 percent in 1996, two years after theNorthridge Earthquake, which caused over $17 billion in damages in2005 dollars. The trend, she noted, is not surprising as consumersstart to feel they no longer need coverage the further into thepast a major event moves.

|

“People buy coverage a year or two after a major event,” shesaid, and then simply drop it as their sense of risk fades.

|

Price might be another factor, as well as the coverage offered,industry observers say.

|

Whatever the reason, most Californians know they are not readyfor another quake. A poll sponsored by Fireman's Fund and theInsurance Information Network of California conducted in Februaryshowed only 22 percent of residents in the state believe they are“prepared” or “well prepared” for a catastrophe. In the Bay Area,the poll showed only 44 percent saying they are prepared or wellprepared for an earthquake.

|

Some within the insurance industry are pushing for a morenational system of disaster preparation. ProtectingAmerica.org–anadvocacy group originally formed by Allstate to promote theformation of state catastrophe funds backed by a federal pool–istaking part in events marking the quake's centennial as a means ofreminding Americans about natural disaster risks.

|

“The commemoration of the San Francisco earthquake is anopportunity when all of America's eyes will be focused on SanFrancisco,” with all its insurance implications, said PeterMcDonough, a representative for the group.

|

Although San Francisco is known for its vulnerability toearthquakes, Mr. McDonough said his group also wants to spread theword about other dangers, such as the New Madrid fault line runningfrom the Missouri-Illinois border down into Arkansas.

|

A quake roughly equal to the 1906 San Francisco event hit alongthat fault line in December 1811–and over a much larger area–but isfar less well known because the region was not as well populated.That earthquake changed the flow of the Mississippi River, he said,and another like it striking today could cause severe damage tocities such as St. Louis and Little Rock.

|

“This is an opportunity for us to say that this doesn't justhappen on the West Coast–it happens in the heartland,” he said.

|

Swiss Re's Mr. Castaldi advised a more cautious approach for anynational catastrophe insurance system, however, noting that thefinancial losses from an earthquake must be felt somewhere, andthat any system must be actuarially sound.

|

“Somebody's going to pay,” he said. “It's not free, whether it'sthe taxpayer or the policyholder who's paying throughpremiums.”

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.