BRACING FOR THE “BIG ONE:” EARTHQUAKES JUST AS RISKY”

Although hurricanes have received wide attention in the media, earthquake exposure also should be a significant concern. Forecasts of potential damages indicate that earthquake destruction could be just as massive as that from a major hurricane.

History of the hazard
The earthquake activity in Hawaii that began on Oct. 15, 2006, has served as a recent reminder of the ever-present threat of quakes and the level of damage that can result. Total property damage is estimated at approximately $100 million, excluding the costs to repair or rebuild private homes. On Oct. 18, 2006, RMS released a preliminary modeled loss estimate, which indicated that total property insurance losses would be on the order of $40 million to 60 million. Almost all of the loss will be to commercial lines and government facilities, with minimal insured residential loss.

In 2006, the insurance industry also marked the 100-year anniversary of the San Francisco Earthquake and Fire of 1906, one of the most powerful earthquakes in U.S. history. A RMS study estimated that if that earthquake were to occur today, it would result in $80 billion to $106 billion in insured losses. The worst insured U.S. earthquake was California’s 1994 Northridge Earthquake, which resulted in $12.5 billion in insured losses. Seattle, another highly developed area, experienced $305 million in insured losses from an earthquake in 2001.

The West is not the only area exposed to earthquakes. Communities along the New Madrid fault in Illinois, Kentucky, Tennessee, Missouri and Arkansas also are at risk. In 1811 and 1812, a series of quakes in and around New Madrid, Mo., shifted the landscape so drastically that new lakes were formed and the Mississippi River reversed its course for a short time. A similar earthquake today would cause major devastation in several highly populated and developed areas.

Challenges in underwriting quakes
Earthquakes are difficult to predict. Today’s earthquake catastrophe models use information from the U.S. Geological Survey National Seismic Hazard maps and source geometry, which enables the models to determine a location’s risk in relation to its distance to a fault or area source. Forecasts also account for the cyclical nature of an earthquake, analyzing the probable time in which the next earthquake might occur.

Commercial clients may be surprised to find that earthquake coverage premiums have increased considerably in the past year. In the 2006, a Council of Insurance Agents and Brokers survey reported that commercial earthquake insurance increased 50 to 100 percent, with significant increases in deductibles as well. A key factor that contributed to higher costs is the increased potential for losses, which stemmed from modeling companies’ new understanding of loss amplification, particularly demand surge, to heighten loss potential. That has lead to similar market pressures in earthquake coverage.

Improving submissions
To analyze a property’s earthquake risk, carriers will want to know if an organization has performed significant structural upgrades, and whether mechanical and electrical equipment is braced properly.

Is there bracing around the foundation? Has the building sustained damage or duress in past quakes? For older buildings in earthquake-prone areas, how and when was the building structurally retrofitted?

All of that information can greatly assist in availability and pricing of capacity.

By providing accurate information on dates of construction, many carriers can automatically apply milestone years for building code revisions. For instance, with a building constructed in California after 1950, carriers can assume buildings follow codes passed to guard against loss to frame risks by bolting the building to the foundation. Likewise, 1976 building codes called for roofs to be anchored on concrete tilt-up buildings. If a carrier is underwriting a building constructed in 1980, it can assume the building is compliant with the building code revision.

Beyond providing comprehensive risk information in submissions, agents and brokers should take a similar approach to the one they take with hurricane coverage — work with clients to design a layered program that maximizes insurance protection in the event of a quake while mitigating as much of the risks as possible.