This year marks the centenary of the 1906 San Francisco Earthquake, an event that changed how insurers evaluated peak risks. But 100 years on, managing earthquake risk is still a challenge for the industry, according to a report by Swiss Re.
The 7.9 magnitude earthquake cost insurers $235 million ($4.9 billion in today’s money) – more than 100 times the 1906 premium for fire insurance in San Francisco. The loss effectively eliminated the entire U.S. insurance market’s profit for the preceding 47 years. The ramifications for the industry were profound.
“It was a milestone event from the point of view of science and the insurance industry,” says Mariagiovanna Guatteri, catastrophe perils specialist for earthquakes at Swiss Re and co-author of the reinsurer’s Sigma report ‘A shake in insurance history: The 1906 San Francisco Earthquake’. “In 1906 the insurance landscape was different than it was today. There was not much unity in policy wording.”
There was a lack of clarity about whether losses were caused by the earthquake itself or fires following the earthquake. This made it difficult to apply vague earthquake clauses. Insurers eventually paid 80% of all claims, despite the fact that many of the losses were not intended to be covered in contracts.
Since then, the industry has built the framework to be able to provide earthquake cover. Insurers have increasingly used seismic science for risk evaluation, evolving into the models used today.
But the report points out that there is a growing need for claims paying ability. Property values and populations in earthquake-prone areas have increased rapidly, insurance penetration for natural catastrophes has risen, and the density of commercial networks has increased, leading to greater potential for indirect losses such as those from business interruption.
But Guatteri believes there is enough insurance capacity for earthquakes. The report says alternatives to traditional coverage such as catastrophe bonds are a good way of providing additional capacity.
“From an insurance point of view, I think there is enough capacity. There are also alternative risk programmes that can take out peak risks,” says Guatteri.
The 1906 earthquake affected a 430 kilometre (270 mile) section along the San Andreas Fault. If it happened today, says the report, it would cause more than $200 billion of direct and indirect losses. The insurance industry would pay between $45 billion and $60 billion. A large part of the economic losses would be in the city and county of San Francisco because of the high concentration of insured values and old residential buildings.