The 1906 earthquake and Hurricane Katrina
Similarities and differences Implications for the insurance industry
The San Francisco earthquake and the subsequent fires and dynamiting of buildings was one of the first major catastrophes to hit the insurance industry. Approximately one-fifth of the city was destroyed, representing some 80% of property values there. The total damage has been estimated in excess of US$ 500m in 1906 values, of which roughly $180m was insured. Several insurers were unable to indemnify their clients. Munich Re paid claims amounting to around 13% of the company's net annual premium revenue. 99 years later, Hurricane Katrina was the biggest natural disaster in the US since the 1906 earthquake.
On 29 August 2005, Katrina made landfall south of Buras, Louisiana, on the US Gulf Coast. Total economic losses from Katrina are now estimated at about US$ 125bn, of which US$ 45bn is insured in the private market. In the first days after the event, its full dimension and the extent of losses — both insured and uninsured — were seriously underestimated. In consequence, many questions have been raised about risk assessment. Was Katrina a unique case or are there lessons to be learned with regard to large disasters in general? The 100th anniversary of the San Francisco earthquake of 18 April 1906, and the 70% odds of a large earthquake striking the Bay Area within the next 30 years (WGCEP, 2003) provide an urgent reason to address this question. Total economic losses from Katrina amount to about 1% of the US GDP, and insured losses represent about 10% of the annual property premium written in the US market. This compares to the 1.8% of the GDP lost as a result of the San Francisco earthquake of 1906. A comparison of insured losses is not possible as figures for the annual market premium are not available.
Several analogies can be drawn between Hurricane Katrina and the 1906 earthquake. But there are differences, too. Factors which have amplified the losses from Katrina could also have an effect after a great earthquake in the San Francisco Bay Area:
Fire following earthquake
This consequential hazard could be the equivalent of the storm surge caused by Katrina. Although less probable than in 1906, it could still play a critical role under unfavourable circumstances. For the insurance industry, the problem is exacerbated by the fact that fire exposure is six to seven times higher than earthquake exposure due to the low penetration of earthquake insurance.
Demand surge and claims handling
The extent of losses due to a San Francisco earthquake would quite probably exceed Katrina losses. Repair cost inflation is inevitable after events of this size, and the huge number of claims leads to problems in claims handling. Separating wind losses from water losses was a challenge after Katrina, and the same may apply to earthquake and fire losses in a future San Francisco earthquake.
Key industries:
In Katrina, the oil industry was severely affected. The equivalent in a San Francisco earthquake would be the software industry. Tourism is as important for San Francisco as it is for New Orleans and would also suffer as a result of an earthquake.
Economic disruption
Transportation and supply lifelines are heavily exposed in the Bay Area. Although prevention measures are definitely better than in New Orleans, this does not mean that there would be no serious disruption of economic activity, with corresponding effects in terms of business interruption insurance claims.
In order to manage the risk from large natural disasters like Katrina or a future San Francisco earthquake, all stakeholders must work together and share the risk. Under the principle of risk partnership, the roles of private citizens, local/state/federal government, and the insurance industry in preparing for and responding to such disasters must be clearly defined beforehand. It is not a question of whether the 1906 earthquake will be repeated, but when. It is in everyone's interest to prepare accordingly in order to make California more disaster-resilient.