Earthquake Outlook: Insurance Buyers Need Stable, Secure Carriers For 2010 and Beyond
In addition, while the property & casualty industry's insured losses in the United States totaled $11.1 billion in 2009--much less than in recent years--the last decade has seen losses more than double ($193 billion in 2000s) from the losses in the previous decade ($89 billion in 1990s).
While the reasons are many, one key explanation for that upward trend is the increasing aggregations in high-risk regions of the country--including those with high-risk potential for earthquakes. Apart from Haiti and Chile, other recent earthquakes in California and China serve as grim reminders of the loss potential and volatility that persists in the global property and casualty insurance industry.
According to Laurie Johnson, PhD, AICP senior science advisor at Lexington Insurance Company, it's important to pay attention to the future when it comes to earthquakes on American soil.
"Many parts of the country have had major earthquakes in the past, and are vulnerable to future damaging events," says Johnson, an internationally known expert in the field of catastrophic risk assessment with more than 20 years of professional experience in urban planning, risk management, and disaster recovery research and consulting.
Johnson cites some past U.S. earthquake history. In the Central and Eastern U.S., for example, four major earthquakes (magnitudes 7 to 8) struck the New Madrid region in 1811-12; Charleston, S.C. had a magnitude 7.3 in 1886; a magnitude 6 earthquake struck near Cape Ann, Massachusetts in 1755; and a magnitude 7 occurred near Charlevoix, Quebec in 1663 and was felt across New England.
In the Western U.S., the Cascadia subduction zone, which runs from far northern California to Vancouver, has generated some very large magnitude 9 earthquakes; the San Andreas system and adjoining faults in both Southern and Northern California have generated several magnitude 7 and 8 events over the past centuries; and even the Rocky Mountain region has had some large events. Also, both Hawaii and Alaska have experienced large damaging earthquakes.
What are the odds of a major earthquake hitting the U.S.? The 2007 Working Group on California Earthquake Probabilities reported there is a nearly 100 percent likelihood of one or more magnitude 6.7 or greater earthquakes occurring somewhere in California in the next 30 years. Experts estimate that a repeat of the 1906 Northern California earthquake alone could cause economic losses exceeding $150 billion, with insurance loss estimates exceeding $50 billion.
With that possibility looming, Johnson says priority consideration should be given to regions of the U.S. and associated seismic zones that are capable of large earthquakes but are "overdue" in terms of their estimated return period, or recurrence intervals. The 2007 Working Group, for example, identified the top seven faults with the most likely chance of going - all of them are in the heavily populated areas of northern and southern California.
In southern California, they rank the southern-most portion of San Andreas fault as the most likely generator (60% probability) of a magnitude 6.7 or greater earthquake in the next 30 years. A 100-mile southern section of the fault runs south from San Bernardino to the Mexican border. It had its last major earthquake around the year 1690. Also, the section north of San Bernardino (and extending up another 225 miles to Monterey Bay) ruptured in 1857 in what became known as the Fort Tejon earthquake.
"Stress accumulation across these two sections of the southern San Andreas, and studies of their paleoseismology, suggest that we are now at, or passing, their mean recurrence intervals of 300 and 140 years, respectively," Johnson explains.
She adds that in northern California, the Hayward-Rodgers Creek fault, which runs along the foothills of Oakland, Berkeley and the East Bay, has a 30% likelihood of a magnitude 6.7 or greater earthquake in the next 30 years (the last major earthquake on this system occurred in 1868, and the fault has a mean recurrence interval of 140 years).
"Scenarios for these three fault systems, as well as the northern San Andreas fault, have been studied recently, and all four are capable of generating damage in excess of $100 billion," Johnson says.
In its 2008 work, the U.S. Geological Survey released a scenario study for magnitude 7.8 earthquake on the southern San Andreas fault, known as the "Great Shakeout" earthquake scenario. Such an earthquake could cause over 1,800 deaths and significantly impact and displace over 100,000 households. Structure and contents damage could cost over $100 billion. Also, business interruption and traffic delay costs could generate a comparable indirect loss of $100 billion.
In northern California, similar loss levels are estimated by the scenario studies for repeats of the 1868 Hayward and 1906 San Francisco earthquakes. Estimates are that there could be over 100,000 uninhabitable housing units, with as many as 220,000 people displaced. For the Hayward scenario economic losses could be as high as $235 billion, and insurance losses of up to $30 billion.
Outside of California, large earthquakes centered near the metropolitan areas of New York, Charleston, St. Louis or Memphis, and Seattle or Portland could also generate multi-billion dollar economic loss scenarios. Also, because earthquake insurance penetrations are higher in seismic regions outside California, the proportion of insurance payouts would also likely be higher than the proportions expected within California.
Given those scenarios, Johnson offers this advice for insurers and policyholders in looking at 2010 and beyond.
"We've had some recent wakeup calls in Northern and Baja California, Haiti, and Chile to remind us that earthquakes are a real and present risk," she says, adding that valuable new science has been introduced in the last couple of years with some fairly strong prognoses that large damaging earthquakes are coming. "Insurers and policyholders need to develop risk management strategies that properly evaluate the assets they are trying to protect as well as the physical and economic conditions of the surrounding region."
Johnson notes that state and local governments are fiscally challenged, and infrastructure has been neglected for a number of decades. In 2009, for example, the American Society of Civil Engineers gave the state of U.S. infrastructure a grade of "D," and estimated that it would cost $2.2 trillion to upgrade it. Also, excessive damage to transportation and utility systems could cause unanticipated and prolonged business disruptions. In addition, current economic conditions of a region can also be a factor in delaying or accelerating recovery. Governing capacity and leadership can also influence the recovery.
"Even though the private sector might be ready to respond, the public sector must be able to engage too," Johnson says. "Haiti is an extreme example of a government that is overwhelmed and unable to manage the catastrophic scale of this disaster."
So what can be done to limit damage and exposure should that massive event, or more than one, take place? Sanjay Godhwani, FCAS, MAAA, executive vice president and Property Division executive of Lexington Insurance, says several things need to happen, including:
-- Insurers need to protect capital today and develop contingency plans for raising capital quickly if needed in the future.
-- Buyers need to adequately estimate potential losses. While history is always an important source of risk management information, using models to examine the historical record enables more robust risk management analyses and more informed decision-making.
-- Buyers should consider questions like: Are potential business interruption losses and the prolonged effects of damage to regional infrastructure systems accounted for in your insurance purchase? Are attempts to cut costs (and hence take on larger deductible or quota share positions) leaving you with less limits and more vulnerability?
Godhwani concludes, "As the frequency and severity of unexpected catastrophic events has increased, companies should seek relationships with insurance companies who offer the longevity and financial stamina to weather these unexpected events with their policyholders."
To learn more visit www.Lexingtoninsurance.com to access information such as a recent whitepaper, Winds of Change: The Shifting Landscape of Catastrophic Risk including expert views from Dr. Laurie Johnson, Sanjay Godhwani, and other well known experts and view the webcast, Lessons Learned in Chile and U.S. Earthquake Resiliency to hear lessons learned from the 2010 Chilean earthquake and how these lessons are directly relevant and transferable to the U.S, and our catastrophic risk management preparedness.
June 1, 2010
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