P/C industry may be long overdue for massive losses from an extreme “great” earthquake

>Study says industry could suffer from a $100 million loss

The U.S. property/casualty insurance industry is long overdue for heavy losses from a massive earthquake, reports A.M. Best in its recent “2006 Annual Earthquake Study.” It is likely that if an earthquake of 7.6 magnitude occurred in San Francisco today, the insured loss would top $100 billion, the report says. The next “great quake” is only a matter of time.

The San Francisco Bay area, which includes Oakland, has a well established potential for destructive ground shaking. Less well known, at least to the general public, is the time bomb not far from St. Louis: the New Madrid fault. While northern California is assumed to be a candidate for such a temblor, other major metropolitan areas are at some risk for a similar level of earthquake devastation. Among those areas are Chicago, Philadelphia, Tokyo and Vancouver, Canada.

If such a disaster occurred today, insured loss undoubtedly would be severe, placing financial stress on thinly capitalized insurers with heavy concentrations of earthquake, fire, multiperil and automobile physical damage coverage in the stricken area, the study reports.

Further, because of generally low take-up rates on earthquake insurance, a major earthquake would tend to do more damage to the economy than would a more fully insured catastrophe of equivalent insured loss. This is due to the relatively greater uninsured loss that has to be absorbed by those without insurance.

Best’s study provides historical perspective on earthquakes and the insurance industry, as well as an examination of the ability of the insurance industry and the public to absorb losses from a “major” or “great” earthquake, otherwise referred to as a mega-catastrophe.