Canadian Underwriter

Repeat of 1811-12 series of central US earthquakes could cost industry US$150 billion: Swiss Re

July 16, 2015   by Canadian Underwriter

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If the series of earthquakes that destroyed the Missouri community of New Madrid more than 200 years ago were to recur today, insured losses could be in the order of US$150 billion, Swiss Reinsurance Company warned Wednesday in a report.

Hurricane Katrina caused US$78 billion insured losses

By comparison, Hurricane Katrina caused $78 billion in insured losses while the Tohoko quake that hit Japan in March, 2011 caused $36 billion in insured losses, Swiss Re suggested in the paper, titled Four Earthquakes in 54 Days. All figures are in United States dollars.

In a separate backgrounder, the U.S. Geological Survey reported earlier that two large earthquakes, five hours apart, were felt December 16, 1811, centred in the New Madrid area, about 200 kilometres south of St. Louis. The second was an aftershock of the first.

“People were awakened by the shaking in New York City, Washington, D.C., and Charleston, South Carolina,” USGS stated.

Two more major quakes, estimated at more than Magnitude 7, occurred Jan. 23 and Feb. 7, 1812. The latter one destroyed New Madrid, USGS reported.

Those quakes were “by far the largest east of the Rocky Mountains in the U.S. and Canada,” USGS noted, suggesting investigators have estimated return periods of 400 to 1,000 years. “The region most seriously affected was characterized by raised or sunken lands, fissures, sinks, sand blows, and large landslides that covered an area of 78,000 – 129,000 square kilometers,” USGS stated, adding that chimneys were toppled and log cabins thrown down in Cincinnati and St. Louis, as well as many places in Kentucky and Tennessee.

“Today, this area is more densely populated, has a complex infrastructure, a vulnerable aged building stock, many important industries and is a critical link for commerce,” Swiss Re Group chief underwriting officer Matthias Weber wrote in an introduction to Four Earthquakes in 54 Days. “The natural catastrophe experts at Swiss Re used the 1811/1812 series of earthquakes as a backdrop to illustrate many of the considerations that we should be accounting for when trying to understand the complete risk to the New Madrid region of today.”

Related: Catastrophe models don’t account for all losses: Lockton

Using its own models, Swiss Re calculated insured losses from the main shock and aftershock Dec. 16, 1811 would be $33 billion if it happened today. As “isolated events,” insured losses from the earthquakes Jan. 23 and Feb. 7, 1812 would be $23 billion and $39 billion respectively.

“These numbers are calculated using Swiss Re’s loss modeling program and a representative database of earthquake insured property and business interruption,” Swiss Re stated in the report, published by Armonk, N.Y.-based Swiss Re America and written by Iain Bailey, an earthquake specialist for the reinsurer. “Our modeling program is built internally by scientists and engineers, and incorporates a wide range of factors in its loss calculation such as building age, building height, local building codes, location-specific soil properties, potential for fire damage and detailed consideration of all deductibles and limits.”

Swiss Re earthquake specialist Iain Bailey wrote a report estimating losses to the insurance industry of a repeat if the New Madrid series of earthquakes in 1811-12

The soft soils in the Mississippi basin could increase the duration and intensity of seismic shaking, Bailey warned, adding saturated solids are prone to liquefaction, which can “upset foundations and cause a total loss to an otherwise undamaged building.”

There is also a “higher vulnerability” in the central U.S. (compared to California), due to buildings constructed before current seismic codes were put in place, Bailey suggested.

Swiss Re estimates about 60% of homeowners in the affected area are not covered for earthquake, and those who are have deductibles of up to 20%.

“If the repair bill exceeds the owner’s equity in the house, it could make economic sense to walk away from the property and the debt,” according to the report. “Mortgage companies could be saddled with thousands of uninhabitable houses, lower asset values and a notably reduced income.” [click image below to enlarge]

Swiss Reinsurance Company published an estimate of losses if the 1811-12 New Madrid series of earthquakes were to recur today

To arrive at the $150-billion total, Swiss re also assessed factors of loss estimates “that would be amplified further by prior or subsequent earthquakes.”

That total also takes into account business interruption claims, a surge in demand for construction materials and labour and the complexity of handling claims.

“In the worst-case scenario, a single insured location may be damaged by each of the earthquakes in the sequence then visited by a different adjuster each time,” Bailey wrote. “Major structural damage to a building can sometimes be difficult to identify from a visual inspection, even for a trained engineer. It would be even more difficult to assign damage to each of the individual events. Different adjusters may come to different conclusions, increasing the likelihood of disputes and costly settlement processes.”

One option available would be to “preemptively pool claims resources, so that individual adjusters become responsible for all claims in a specific region, regardless of which insurer is responsible for those claims,” Bailey noted. “It’s also important to be realistic about the experience and ability of adjusters to deal with earthquake damage.”

Related: Get ready for an earthquake in Eastern Canada, experts warn insurance industry

BI “covers lost earnings that would have been generated had the earthquake not occurred,” according to the report. “Claims can often be driven by the breakdown of one small component of a company’s operating model. For example, damage to a small component of a machine that’s only manufactured in Europe or Asia can leave a factory non-operational while a replacement part is being shipped.”

BI “is especially relevant for a New Madrid earthquake because of the large area affected and vulnerability of the transportation network,” Swiss
Re warned, adding airport runways in Memphis and St. Louis could be rendered unsafe due to shaking and liquefaction.

Swiss Re suggested there are six road bridges and five rail bridges crossing the Mississippi River between St. Louis and Memphis.

It is “likely” that “most, if not all” the road bridges would be closed until a damage assessment is made, according to the report.

“For rail the outlook is worse because the bridges are older and therefore not as strong.”