At 5.12 a.m. on 18 April 1906, a magnitude 7.9 earthquake rocked the city of San Francisco. Within a very short space of time, thousands of buildings collapsed and fires raged for three days, razing nearly the entire city centre to the ground. 120 years later, the city is much better protected, but that doesn’t mean it’s safe.

The quake of 1906 is considered one of the most severe earthquakes of all time. It was triggered by a rupture of the San Andreas Fault, where the North American and Pacific tectonic plates slide past each other, shifting 2–3 cm per year. According to the U.S. Geological Survey (USGS), the rupture’s total length was 296 miles (477 kilometres). In some places the quake shifted the sides by six metres at the surface. 

As a result, around 28,000 houses in San Francisco were destroyed by the tremors and subsequent major fires. Broken water pipes hindered firefighting efforts. Half of the city’s approximately 400,000 inhabitants were left homeless, while around 3,000 lives were lost in the city and the surrounding area.

The property damage was estimated at more than US$ 500m at the time, most of which was caused by fires. Insurance companies paid out around US$ 180m in 1906 dollars. Losses from collapsing buildings weren’t covered by standard insurance policies, whereas losses from fires were.

For Munich Re, the quake was a watershed: total payouts, at 11 million German marks, were the largest in the 26 years since its founding. To this day, it remains the largest single loss from a natural disaster in Munich Re’s history in relation to premium income, representing more than 7.3 percent of annual premiums at the time.

Today, San Francisco is better prepared – but still at serious risk. The number of people living in the San Francisco Bay area has increased tenfold, while the values exposed have grown even more, including the high concentration of digital infrastructure in Silicon Valley. Although California has one of the strictest building standards worldwide, and firefighting systems for high-rise buildings are also designed to be quake-proof, there are still many old buildings and infrastructure facilities in the San Francisco Bay area that are not reinforced and would not withstand a major quake.

Another quake like the one in 1906 could mean another disastrous loss scenario for the entire Bay area. Back in 2006, a study estimated the potential direct economic losses at between US$ 90bn and 120bn. In addition, the building stock value in the Bay area has increased by a factor of two to three since 2006.* Direct overall losses – not including indirect losses – at or beyond the US$ 200bn mark therefore seem to be a realistic assumption.

Unlike in 1906, direct damages caused by an earthquake are now insurable in the region. In California, it is primarily the state-run California Earthquake Authority (CEA) that sells homeowners insurance policies for direct earthquake damage, though they are quite expensive and include high deductibles. The CEA also offers considerable discounts when old buildings are retrofitted for greater stability.

In contrast to direct shake losses, losses from fires following an earthquake are covered in standard homeowners policies: California is one of the so-called SFP states, where the “Standard Fire Policy” sets the wording framework for standard building insurance. Among other risks, this covers damage caused by fires of any kind, including those resulting from earthquakes. It is only in regions at an extremely high risk of wildfires that homeowners have to rely on coverage through the state-supported “FAIR Plan” insurance programme, if standard insurers no longer provide coverage

In the event of a quake, the insured losses would therefore depend heavily on the type of damage: around US$ 30bn if comparatively few fires broke out, up to more than US$ 100bn if there were multiple major fires and strings of infrastructure outages. However, estimates are very difficult: due to the very small number of historical events, the risk is more difficult to assess than other natural hazards.

According to CEA estimates, less than 15 percent of homeowners throughout California have taken out insurance against direct earthquake damage. In light of the known threat, this could be due not only to the price of insurance and high deductibles. All in all, it seems that many people simply choose to take their chances. Furthermore, major mortgage lenders do not require earthquake insurance as a condition for granting loans. Nor do the Basel regulations for banks grant financial institutions any capital relief in the case of earthquake insurance for properties in their loan portfolios.

Insurance coverage for direct earthquake damage is also relatively uncommon in the commercial sector. Large corporates are likely to have higher coverage due to commonly used all-risk policies, which regularly include sub-limits to cap liability. Business interruption insurance, which covers indirect losses resulting from service interruptions after damages at suppliers’ facilities, often only takes effect after a certain waiting period.

A severe earthquake in California is one of the costliest risk scenarios for Munich Re. Therefore, we manage our exposure to earthquake losses and consequential losses very precisely, while maintaining a reliably high capacity. As a leading risk carrier with considerable financial resources and unique expertise, Munich Re generally grants risk cover, provided the rates and conditions are commensurate with the assessed risk.