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Lessons for the industry

After the earthquake an increased scientific interest in seismology and geology, as well as new thinking on engineering and building construction, emerged. Today buildings in San Francisco are largely earthquake proof. In fact, during the earthquake in 1989, the Transamerica Pyramid in San Francisco swayed more than a foot but was not damaged.

From an insurance perspective, the losses challenged existing perceptions about risk and its management, and raised many questions about coverage, exclusions, causes of loss, loss adjusting and loss wordings. But it also saw the industry embrace advances in these fields, leading to the sophisticated building and risk modelling practices which help to protect against the devastating effects of such a severe earthquake.

A century later, Lloyd’s has in place a range of Realistic Disaster Scenarios (RDS) which act as loss modelling tools and provide estimates of syndicates’ exposures to a range of events. If a similar event were to happen in San Francisco today, the estimated loss would be around $60 billion. This takes into account residential property losses of $27 billion, commercial property losses of $27 billion, workers’ compensation losses of $5 billion and auto losses of $1 billion.

In addition, further losses could arise from marine, specie and fine art, personal accident, aviation hull, liability and business interruption.

It is well documented that many of the losses from 1906 could have been avoided, such as those resulting from arson and the inadequate fire fighting strategy. And while it’s comforting to think that such a situation would be better handled today, the aid and clean up operation for hurricane Katrina last year suggests that such optimism may be misplaced. Nevertheless, just as there are lessons to be learnt from the San Francisco earthquake and fire, there’s also inspiration to be gained from the way that cities, with the help and financial backing of the insurance industry, can be reborn. 

In the majority of cases, earthquake risk is still excluded from standard homeowners or business insurance policies in the US. Coverage usually has to be provided by an additional clause to the policy. However, fire resulting from an earthquake has been included in most policies since 1906. Despite the risk of earthquake in the US (most states have had one), it’s estimated that only 20% of households have cover.