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RMS Study Estimates $50-$80 Billion of Insured
Losses From a Repeat of the 1906 San Francisco Earthquake and Fire
Insured Losses Expected to Amplify Due to ’Super
Cat’ Effects
Newark, Calif. – April 18, 2006– Risk
Management Solutions (RMS), the world’s leading provider of products and
services for catastrophe risk management, announced the results of a
study analyzing the impacts of the 1906 San Francisco Earthquake and
Fire based on the 2006 population and property exposures of the San
Francisco Bay Area. The study provides a comprehensive update to a
detailed contemporary reconstruction of the earthquake first published
by RMS in 1995. The new 2006 RMS analysis reveals that a Mw7.9
earthquake on the northern section of the San Andreas Fault today would
result in at least $260 billion of damages to residential and commercial
exposures, of which $50-$80 billion would be covered by property and
workers compensation insurers. In contrast to the 1906 event, where 80%
of the losses were caused by fire, less than 15% of the estimated total
insured property losses are expected to be fire related in 2006.
The property and workers compensation losses
estimated in the RMS report include residential and commercial property
and contents losses, as well as direct business interruption and
additional living expenses due to ground shaking. In the RMS scenario,
strong ground shaking affects 19 Bay Area counties, with an estimated
building inventory value of approximately $2 trillion for residential,
commercial, and industrial properties.
This insured loss estimate accounts for the effects
of ‘loss amplification’-the range of
processes, including economic demand surge, that raise the total costs
paid out by insurers in the aftermath of the largest catastrophes. The
analysis also includes the impacts and expected costs of fires starting
and spreading within those areas with the highest levels of predicted
damage.
“The insured loss estimate for this event is four
times greater than the 1994 Northridge Earthquake, the worst insured
loss experienced to date in California,” said Dr. Patricia Grossi,
earthquake model manager at RMS. “However, as a result of the dramatic
decline in residential earthquake insurance take-up rates, the expected
proportion of the total economic losses covered by insurance is lower
than it was following the Northridge Earthquake. This insured proportion
is also significantly lower than in 1906.”
RMS has also revisited the events that took place
during and after the 1906 catastrophe to gain a better understanding of
the processes that determined the eventual cost of the catastrophe. The
new RMS report demonstrates the features the 1906 San Francisco
Earthquake and Fire had in common with Hurricane Katrina and the Great
New Orleans Flood. Both were urban disasters affecting major coastal
port cities with populations of around 450,000, with secondary
consequences causing three to four times as much damage as the original
event. In both cases, the magnitude of the damage led to large scale
evacuation and significant depopulation in the weeks following the
disaster. While the reconstruction of New Orleans has scarcely begun,
the 1906 Earthquake was followed by pressure to expand the terms of
insurance payments and rampant demand surge during the rebuilding.
“Hurricane Katrina and the 1906 Earthquake provide
object lessons on how one high-impact event can create a cascade of far
more damaging consequences. A whole new tier of economic, behavioral,
and systems-based modeling is required to predict the losses in such
Super Catastrophes,” added Dr. Robert Muir-Wood, chief research officer
at RMS. “While technology, building styles, and economic values have
changed dramatically, the 1906 San Francisco Earthquake and Fire
provides many insights into what will happen the next time there is a
great earthquake close to a major U.S. city.”
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