RMS Estimates Repeat of 1906 San Francisco Quake Would Cause $50 Billion to $80 Billion in Insured Losses

April 19, 2006

Based on 2006 population and property exposures in the San Francisco Bay area, Risk Management Solutions, Newark, Calif., estimates there would be at least $260 billion in damages to residential and commercial exposures if the 1906 San Francisco Earthquake and Fire were to repeat itself.

In its study, RMS analysis revealed that a Mw7.9 earthquake on the northern section of the San Andreas Fault today would require $50 billion to $80 billion be covered by property and workers compensation insurers. In contrast to the 1906 event, where 80 percent of the losses were caused by fire, less than 15 percent of the estimated total insured property losses are expected to be fire-related in 2006.

The property and workers compensation losses estimated in the RMS report include residential and commercial property and contents losses, as well as direct business interruption and additional living expenses due to ground shaking. In the RMS scenario, strong ground shaking affects 19 Bay Area counties, with an estimated building inventory value of approximately $2 trillion for residential, commercial and industrial properties.

The insured loss estimate accounts for the effects of “loss amplification” the range of processes, including economic demand surge, that raise the total costs paid out by insurers in the aftermath of the largest catastrophes. The analysis also includes the impacts and expected costs of fires starting and spreading within those areas with the highest levels of predicted damage.

“The insured loss estimate for this event is four times greater than the 1994 Northridge Earthquake, the worst insured loss experienced to date in California,” said Dr. Patricia Grossi, earthquake model manager at RMS. “However, as a result of the dramatic decline in residential earthquake insurance take-up rates, the expected proportion of the total economic losses covered by insurance is lower than it was following the Northridge Earthquake. This insured proportion is also significantly lower than in 1906.”

RMS has also revisited the events that took place during and after the 1906 catastrophe to gain a better understanding of the processes that determined the eventual cost of the catastrophe. The report demonstrates the features that the 1906 San Francisco Earthquake and Fire had in common with Hurricane Katrina and the Great New Orleans Flood. Both were urban disasters affecting major coastal port cities with populations of around 450,000, with secondary consequences causing three to four times as much damage as the original event. In both cases, the magnitude of the damage led to large-scale evacuation and significant depopulation in the weeks following the disaster. While the reconstruction of New Orleans has scarcely begun, the 1906 Earthquake was followed by pressure to expand the terms of insurance payments and rampant demand surge during the rebuilding.

“Hurricane Katrina and the 1906 Earthquake provide object lessons on how one high-impact event can create a cascade of far more damaging consequences. A whole new tier of economic, behavioral, and systems-based modeling is required to predict the losses in such Super Catastrophes,” added Dr. Robert Muir-Wood, chief research officer at RMS. “While technology, building styles and economic values have changed dramatically, the 1906 San Francisco Earthquake and Fire provides many insights into what will happen the next time there is a great earthquake close to a major U.S. city.”

The new 1906 Earthquake report can be downloaded from the RMS web site at http://www.rms.com.

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