Calif. workers’ comp earthquake losses could exceed $150 million annually

California workers’ compensation insurers will need $180 million annually to pay for workers’ compensation losses induced by earthquakes, according to a recently released study by the Workers’ Compensation Insurance Rating Bureau of California. The report, which was conducted by risk modeling company Eqecat for WCIRB, indicated that the losses would affect the approximately 15.57 million employees working during a major earthquake.

California is primarily affected by the San Andreas Fault system, which includes branches, such as the Hayward, Calaveras, San Jacinto, Elsinore, Rodgers Creek, and Maacama Faults, as well as those in the San Bernardino Mountains. The area also is affected by the Newport-Inglewood-Rose Canyon Fault, Palos Verdes and San Clemente Faults, the study indicated.

In its recent report, Eqecat analyzed a suite of probabilistic earthquake events, calculating the expected loss and annual frequency of each event, and noting losses depending on work shift. It is estimated that the estimated annual workers’ comp loss per employee due to an earthquake would be $11.56, the report noted.

Los Angeles County would be most affected by an earthquake, because it has the most workers out of 20 counties listed in the study, with 4.25 million workers. Orange County, which has slightly more than 1.5 million workers, would be the second-most-affected county. It would be followed by San Diego, which has about 1.3 million workers.

All these figures update Eqecat’s 2002 report for the WCIRB, taking into account revised earthquake and casualty rate models, as well as post-2003/2004 reform severity information, the Bureau said.

In WCIRB’s 2002 report, Eqecat estimated statewide average annual expected earthquake losses of approximately $400 million at 2003 cost levels, or about $27 per employee. While Eqecat projected that the average expected level of workers’ compensation losses would be $400 million, the modeling company noted that the estimate was, to a large extent, being driven by estimated losses that would arise from relatively infrequent, catastrophic events.

For example, the Eqecat model estimated a median workers’ compensation loss of $18 billion if the 1906 San Francisco earthquake were to occur in 2003 during peak business hours.

The reduction in workers’ comp earthquake losses from the 2002 report to the 2007 report presumably are due to cost savings from reforms in the workers’ compensation system.

The 2007 study predicts potential losses for events of various severity, such as a one-in-200-year earthquake, one-in-100-year earthquake, one-in-50-year earthquake, one-in-10-year earthquake and one-in-two-year earthquake. Losses were categorized by death, permanent, major, minor, temporary and medical only.

For a one-in-200 event, annual aggregate statewide losses for death were estimated at 1.084 billion. In contrast, the same losses for death for a one-in-100-year event would be $702.3 million. For a 200-year event, total workers’ comp losses would be $6.41 billion. For 100-year event, total workers’ comp losses would be $4.18 billion.

In an unrelated study, Risk Management Solutions, also a risk modeling company, showed that a repeat of the Great San Francisco Earthquake of 1906 today would incur workers’ compensation losses of $11.5 billion to $35.8 billion, exceeding the losses from the 9/11 World Trade Center disaster.

The 1906 earthquake was one of the most destructive quakes in U.S. history, with roughly a magnitude of 8.3. The event caused as many as 3,000 deaths and more than $400 million in property loss in 1906 dollars.

Assuming a similar 1906 earthquake occurs during peak work hours, RMS predicts there would be 115,892 expected workers’ compensation injuries, 6,480 deaths, and $44.5 billion in insured losses (in 2004 dollars). About 72 percent of the workers’ comp losses would be medical only.

Based on its 2004 figures, the most recent available, RMS suggested California risk managers broaden the scope of their analyses when determining how earthquakes will affect their lines of business.

WCIRB said its report should help provide California workers’ compensation insurers with information when making their rate filings with the California Department of Insurance.

Earthquake Workers’ Comp Loss Rate by Injury and Payout Type

Type of Injury Indemnity Medical Total

(In mean dollars) (In mean dollars) (In mean dollars)

Death 250,290 40,447 290,737

Permanent Total 387,555 327,454 715,009

Major 40,308 56,631 96,939

Minor 13,070 16,142 29,212

Temporary 5,490 5,042 10,532

Medical Only 0 2,011 2,011

Source: WCIRB

California/Northern Baja earthquakes greater than 7.0 in magnitude

Date Magnitude

Dec. 1812 7.1

June 1838 7.5

Jan. 1857 7.9

Oct. 1868 7.0

March 1872 7.6

Feb. 1892 7.0

April 1906 7.8

Jan. 1923 7.2

Nov. 1927 7.1

Dec. 1934 7.0

May 1940 7.0

July 1952 7.3

Nov. 1980 7.4

April 1992 7.0

June 1992 7.3

Source: WCIRB