A rise in reinsurance costs, insurance capacity shortages from Hurricane Katrina and a shift in catastrophe modeling services have reduced availability of earthquake damage coverage, an insurance brokerage firm warned today.

J.C. Sparling, executive vice president of Mercator Risk Services, an independent wholesale insurance broker in New York said, “While commercial insurers in California have become an obvious victim of this shortage, a less obvious–but still vulnerable–area lies along the New Madrid Fault Line, which extends through areas including St. Louis and Memphis.”

He said other areas also considered vulnerable are the Pacific Northwest, including Seattle, Portland, Ore. and Alaska.

According to Mr. Sparling, revised catastrophe modeling systems are showing higher probable maximum losses for insurers and reinsurers from wind, flood, and earthquake, causing property underwriters to reassess their exposures on renewals and perhaps increase their attachment points on cat risks. These calculations, in turn, can shrink the level of available earthquake coverage.

“Katrina losses made models look so bad and now they're all being revised,” Mr. Sparling said. “Treaty reinsurers have cut back their lines. One insurance company can only assume as much liability as its reinsurance can support.”

A second concern, voiced by Mr. Sparling, is construction codes that do not account for the potential of a very powerful earthquake in vulnerable areas.

He noted that the New Madrid fault line has not been hit by a major earthquake since a series of extremely powerful shocks and aftershocks hit the region in 1811-1812 at intensities estimated at over 8.0 on the not-yet-invented Richter Scale.

Since then, the region has undergone a series of minor earthquakes over many years yet the vast majority of residents do not seem concerned, he noted.

“As a result, the construction codes along the New Madrid Fault Line are not as strict as they are in areas such as California,” Mr. Sparling said. “Even some buildings that are built to code may not fare well in the event of an earthquake.”

Besides construction, Mr. Sparling mentioned that the soil beneath the buildings is also a factor in how a particular structure may fare in an earthquake. Softer soil can exacerbate the effects of a shaking of the earth. According to Mr. Sparling, buildings in San Francisco are very difficult to insure against earthquake damage.

“Many of the buildings in San Francisco are literally built on mud,” Mr. Sparling related. Because the modeling systems take the soil composition into account, “Cat models will be very punitive for these areas.”

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