Has the re/insurance industry really learned anything from past catastrophic events?

There are few events which can be said to have had a more profound effect on how the international insurance and reinsurance industry operates today than the San Francisco Earthquake of 1906. Shaking the city to its very foundations, the earthquake, which registered some 7.9 on the Richter Scale, resulted in an official death toll of 700 (although the actual figure is believed to be at least three times this amount) and property damage totalling $400m, much of which was caused by the devastating fire which engulfed the city in the aftermath of the quake.

The disaster is even more tragic when one considers that, as pointed out in a recent report issued by Swiss Re, entitled “A shake in insurance history - The 1906 San Francisco Earthquake”, the city's authorities failed to learn any lessons from the Great Hayward Earthquake of 1868, which also hit San Francisco causing some 30 deaths and approximately $350,000 in property damage. In the immediate aftermath, rather than attempting to implement any seismic structural upgrades or analysing the stability of the land upon which they were rebuilding, the authorities favoured haste over safety – hence the new constructions crumbled when the 1906 quake struck.

Since the 1906 event, the insurance and reinsurance industry has played an integral role in the ongoing efforts to better understand the destructive power of these plate vibrations. Giant steps have been taken in an effort to adequately factor into risk paradigms the potential insured losses resulting from such events, and so ensure the provision of adequate cover for even the most earthquake-prone of regions.

Most recently, Guy Carpenter announced a joint initiative with AIR Worldwide to develop a catastrophe model for earthquake exposures in Switzerland. Commenting on the initiative, Jan Störmann, managing director and head of Guy Carpenter's Munich office, said, “Though earthquake activity in this region tends to be less frequent and less severe than in some other European nations, Switzerland is a critical market from an economic perspective, and the loss potential from a significant seismic event is very high.” Despite Switzerland's limited exposure to such destructive natural catastrophes, it should be noted that the city of Basel bore the brunt of an earthquake in 1356, described as “one of the strongest to hit North West Europe” by a report produced by the Swiss Seismological Service and the Institute of Geology of the University of Basel.

While the study described the current seismicity in the Basel region as low, it added that strong earthquakes have to be expected due its geographical location close to the northern boundary of the African-European convergence zone. Were an earthquake of a similar magnitude to that of 1356 to strike Basel today, AIR believes that the region could witness property losses of some $15.3bn.

It is inevitable that the industry will find itself having to respond to “the big one” at some point, with California and Tokyo currently vying for this future title. Standard & Poor's recently calculated that gross payouts from the Japanese non-life insurance industry would reach ¥6.6trn in the event of a major earthquake in the Kanto region on the scale of the 1923 Great Kanto Earthquake, and even after recovery of reinsurance claims, losses would still top ¥1trn.

According to Dr Jayanta Guin, AIR's vice president for research and modelling, were the San Francisco Earthquake to occur today, the disaster would result in almost $80bn of insured property losses, based on total property losses exceeding $300bn. Ironically, while take-up rates for earthquake perils increased after both the 1989 Loma Prieta earthquake and the Northridge earthquake of 1994, Dr Guin said that they have since declined. “Today it is estimated that only about 13% of residential policies currently carry earthquake coverage. While take-up rates for commercial properties are higher, in the decade since the Northridge earthquake complacency has clearly set in.”