Natural Catastrophes

History

San Francisco earthquake

Lloyd’s and the San Francisco earthquake

At 5.13 am on 18 April 1906, San Francisco, the seventh largest city in the US, shook, crumbled and burned to the ground. A massive earthquake, measuring 8.25 on the Richter scale, brought the city to its knees, sparking uncontrollable fires that raged for three days, taking several thousand lives and leaving half of the population homeless. The 1906 earthquake is important in the history of Lloyd’s because it had a profound effect on the insurance industry of today. The aftermath of the disaster laid the foundations for many of today’s modern risk modelling and building practices. The quake was also a key point in the life of the eminent Lloyd’s underwriter, Cuthbert Heath, whose actions during the rebuilding of the city solidified Lloyd’s position in the US market and helped pave the way for Lloyd’s as we know it today.

Lloyd’s role

Through its prominent underwriter, Cuthbert Heath, Lloyd’s played an important part in the aftermath of the quake, which had a dramatic and lasting effect on Lloyd’s and the insurance industry as a whole. During this era, governments were not expected to supply relief funds, so the burden of losses fell on the insurance industry. As one of Lloyd’s leading earthquake underwriters at the time, Heath faced an enormous bill, but he honoured it and famously instructed his San Franciscan agent to “pay all of our policyholders in full, irrespective of the terms of their policies”. The earthquake ended up costing Lloyd’s over $50m - a staggering sum in those days and equivalent to more than $1bn in today’s dollars.

How the San Francisco earthquake changed Lloyd’s and the insurance industry

Heath’s attitude over the San Francisco claims was rewarded, to the benefit of the London insurance market. His actions had highlighted Lloyd’s excellent reputation for paying valid claims - a reputation that still stands today - and business boomed. Until the 1906 earthquake, the placement of insurance risks overseas was viewed with some wariness. Now, Heath had succeeded in cementing Lloyd’s position in the US market and other markets would be sure to follow. The losses incurred challenged existing perceptions about risk and its management, but it also saw the industry embrace advances in these fields as a result. There are now sophisticated building and risk modeling practices in place that help protect against the devastating effects of natural disasters. In most cases, earthquake risk is still excluded from standard homeowners or business insurance policies in the US. However, fire resulting from an earthquake has been included in the majority of policies since 1906. Just as there are lessons to be learnt from the earthquake, there’s also inspiration to be gained from the way that cities can be reborn with the help and financial backing of the insurance industry.

Hurricanes

1954 - Hurricanes Carol, Edna and Hazel

With hurricanes Carol, Edna and Hazel causing $75m of damage in the US, the sheer scale and destruction hurricanes could inflict began to make itself known to the insurance world.

1965 - Hurricane Betsey

Hurricane Betsey was the first tropical cyclone in the Atlantic Basin to cause at least $1bn (1965 value) worth of damage – the most widespread US damage since the San Francisco earthquake. Insurers were badly affected, since the market had been soft, which meant that premiums has been written at very low rates; the average loss per Name was £5,400.Inflation caused added problems, as did a sharp rise in liability awards in the US. A banker at the time commented: ‘I wouldn‘t touch Lloyd‘s with the wrong end of a Kew Garden flagpole.’ Of course, all was far from over, though Lloyd’s had learned a lesson and altered its structure accordingly.

2004 - Hurricanes Charley, Ivan, Frances

In 2004, Hurricanes Charley, Ivan, Frances and Jeanne all hurled their way in over the Atlantic to devastate parts of America and the Caribbean. The total industry loss was estimated to be approximately $25bn, of which Lloyd’s share was $2.3bn.86% of the Florida claims were settled by Christmas. And, while others battened down the hatches, Lloyd's continued to offer insurance. At the time, Jonathan Gray, underwriter for Beazley said: ‘It wasn’t just the size of the loss, but how incredibly hard it was to adjust – with one hurricane following another. But we were there providing cover for homes and businesses immediately afterwards.’

2005 - Hurricane Katrina

Hurricane Katrina was the deadliest and most destructive Atlantic hurricane of the 2005 Atlantic hurricane season and with Wilma, hot on her heels, the most intense tropical cyclone ever recorded in the troubled Atlantic basin. It was the costliest natural disaster, as well as one of the five deadliest hurricanes, in the history of the US. In Katrina’s wake, more than a thousand people lost their lives, tens of thousands were displaced and the once-great city of New Orleans is a shadow of its former self. In difficult circumstances, Lloyd’s responded quickly and strongly, sending thousands of loss adjusters to the region, paying billions of dollars in claims and donating millions of dollars in relief funds. Within hours of Katrina hitting, Lloyd’s had an emergency hurricane response team established in London and the US. We also launched a toll-free helpline to deal with urgent policyholder concerns, which took thousands of calls and helped more than 99% of policyholders initiate contact with the right people in our marketplace. And Lloyd’s was the first to pay claims to the offshore energy industry after the hurricane decimated the Gulf.

Japanese earthquake and tsunami – 2010

The earthquake that hit Japan in 2010 was one of the most powerful in history and triggered a tsunami off the country’s north-eastern coast, killing over 11,000 people, with thousands more missing. The quake followed a spate of disasters in 2010 including earthquakes in Chile and New Zealand and floods in Australia, contrasting with a relative absence of such events in 2009.

Following the Chilean earthquake in February 2010, the Japanese earthquake contributed to 2010 becoming the market’s most expensive year since 2005, when Lloyd's paid out a record £4bn adjusted for inflation, in the wake of hurricane Katrina.

As ever, the primary focus at Lloyd’s was on dealing with claims as quickly as possible, some ¥6.6bn of payments were delivered within just 48 hours of the money being requested by the reinsurers.

Thailand floods – 2011

In 2011 Thailand was hit with severe flooding during the monsoon season. Northern and Central Thailand had the highest recorded rainfall levels in 50 years; flooding went on for several weeks, slowly spreading through 61 of the country’s 77 provinces and eventually reaching Bangkok, inundating large swathes of the city and causing damage to homes and businesses whilst claiming 815 lives.

It would go on to be the world’s most expensive flood in history, causing production to grind to a halt in around 10,000 factories and disrupting supply chains around the world. The flooding had a significant impact on electronics plants; many companies had switched production from Japan to Thailand following Japan’s earthquake and tsunami in March 2011. Tech giant Intel reported a $1b loss in revenue as a result of hard drive factories being flooded, with other tech companies such as Toshiba and Seagate also severely impacted. As a result, the cost of hard drives more than doubled, and at Lloyd’s the supply chain disruptions led to a re-examination of the threats posed to companies dependent on the constant delivery of industrial components.

The total economic losses from the flooding came to around $46bn, with $2.2bn of these losses paid out via the Lloyd’s market, making this the third largest claim the market had faced after hurricane Katrina and the September 11 attacks.

Hard and soft natural catastrophes

Insurance and other forms of financial protection can make a significant contribution to reducing financial vulnerability and supporting economic recovery after a natural catastrophe event. Up until recently, natural catastrophes have fallen under one general category. But now, as environmental conditions evolve, so too does the way in which the market needs to categorise risk.

Two categories of natural catastrophe events are now being used; ‘Hard cat’ risk refers to traditional natural catastrophe events such as earthquakes and windstorms. ‘Soft cat’ risk refers to other extreme unseasonal weather events such as polar vortexes and wildfires.

Specialist natural catastrophe underwriters are now developing more bespoke coverage and policies and integrating these terms into the way they view and handle risk. The idea behind using these terms is that it will help create a more accurate method of categorisation, specifically for policy wording. Rosa Van Reyk, Underwriter at GCube, speaks about the importance of categorising risk and cataloguing damage, read more below.

Sharing risk to face catastrophes