Editor’s Note: If 1906 repeated itself in a major metropolitan space … during working hours … there would

$7 billion in workers’
compensation losses.

Close to home: 1906 revisited

April 18 marks the 100th anniversary of the Great San Francisco Earthquake of 1906, a catastrophe that affected thousands of lives, caused hundreds of millions of dollars in damage, and generated aftershocks in insurance and engineering communities that still resonate today. Where I live in the San Francisco Bay Area, residents see daily reminders of the destructive nature of Mother Nature, with newspapers, TV and even museums detailing the historic event.

Since 1906, the world has made strides in understanding what causes earthquakes and in its ability to erect structures that have a better chance of withstanding the shocks. Yet if an earthquake of similar magnitude were to occur in a major metropolitan area today, the losses would be staggering.

AIR Worldwide Corp., a risk modeling company based in Boston, estimates that a recurrence of the 1906 quake would result in almost $80 billion of insured property losses, based on total property losses exceeding $300 billion. If 1906 repeated itself in a major metropolitan space such as New York, Boston, Washington, D.C., or Philadelphia, and struck during working hours, Dr. Jayanta Guin, AIR’s vice president for research and modeling, estimates there would be approximately $7 billion in workers’ compensation losses. As many as 5,000 fatalities could occur, and more than 50,000 people could be injured, AIR Worldwide estimates.

An insured earthquake loss of $80 billion or greater has about a 0.2 percent annual probability of occurrence. While that annual probability may appear small at first glance, it should not be dismissed. It translates into a 6 percent probability during the next 30 years, and a 10 percent probability during the next 50 years.

According to Guin, three primary factors contribute to the expected losses from a recurrence of the 1906 earthquake and the significant gap between insured property losses and total property losses. Those include more earthquake-resistant building inventory, increased value of property at risk, and a decline in the amount of earthquake insurance being purchased.

Buildings built today are more resistant to the lateral loads imposed by ground shaking than they were in the early part of the century. However, building code changes have been gradual since 1906. Many older buildings – particularly commercial structures – have undergone earthquake retrofits to bring them in line with current standards.

Guin cautions, there is another side to the story. The increase in the number and value of properties counterbalances the increased resilience of the building stock. The total population affected by a recurrence of an earthquake has grown significantly, as the population in the San Francisco metropolitan area has grown to more than 1.7 million, according to the 2000 Census. AIR Worldwide estimates the current value of residential and commercial properties within the damage footprint of the 1906 quake at more than $1.6 trillion.

Insured losses depend not only on the severity of the earthquake and vulnerability of insured properties, but also on policy conditions (deductibles and limits) and take-up rates (the percentage of properties actually insured against the earthquake peril). Take-up rates increased after the 1989 Loma Prieta earthquake and the Northridge earthquake of 1994 – reaching about 35 percent by 1995 – but have since declined. Today, it is estimated that only about 13 percent of residential policies currently carry earthquake coverage.

Although your home may not be in the Bay Area like mine is, estimates such as AIR’s provides remind us all how close we are to 1906 and San Francisco – no matter when or where we live.