‘Big One’ Looms in Minds of Experts Before California ShakeOut

A day before more than 9 million people in California took part in a massive nationwide earthquake drill in mid-October, U.S. Geological Survey seismologist Lucy Jones stood in a room full of risk professionals in the San Fernando Valley and passed on some grim predictions about the “big one.”

Jones and Robert Hartwig, president and economist of the Insurance Information Institute, were at the Los Angeles Risk and Insurance Management Society’s forum, “Rethinking Catastrophic Risk in Risk Management: Earthquake-Related Challenges.”

The forum, which was supported by Cal State University Fullerton’s Center for Insurance Studies, a part of the Mihaylo College of Business & Economics, was in North Hollywood — a half-an-hour drive from the notorious San Andreas Fault that runs north and south in California the length of more than 800 miles.

The following day, the USGS and its partners, including the California Earthquake Authority and the Federal Emergency Management Agency, held the annual Great California ShakeOut, which they say is the “world’s largest earthquake preparedness drill.”

The drill was scheduled 10:18 a.m. on Oct. 18, and more than 9.3 million people participated at schools, colleges, businesses, community organizations, government agencies and households. The number of participants far exceeded 2011’s 8.6 million figure, organizers said.

Several radio stations throughout the state aired a drill broadcast at 10:18 a.m.

In addition to California, other states and countries held ShakeOut drills, for a total of more than 13.6 million participants worldwide.

Such disaster preparedness may come in handy if one heard Jones’ speak at the L.A. RIMS forum a day earlier.

“The San Andreas earthquake is the most likely catastrophic disaster to hit the United States at this point,” she told the crowd.

The Southern portion of the San Andreas Fault stretches from Monterey County to the Salton Sea. The southern part of the fault is capable of earthquakes over 8 in magnitude on the Richter Scale, and the average time between major quakes is 150 years, Jones said.

However the southern portion of the fault has not experienced a large rupture of 7.0 or greater, which many would consider the “big one,” in more than 300 years, according to Jones, who added, “So we’re overdue.”

San Andreas is the state’s fastest known moving fault, and it’s among hundreds of faults spread throughout the region to a point that those who live in Southern California are usually within 10 miles of a fault, Jones said, adding that the region’s soft soil areas can actually amplify shaking as seismic waves roll outward from an epicenter.

Sitting well inland of Southern California’s coveted oceanfront communities, areas around the fault are proving more attractive for homeowners seeking more affordable housing.

Southern California’s last major earthquakes were the 7.2M quake in Landers in 1992 and the 6.7M Northridge in 1994, which likely released energy from the region’s fault system, Jones said.

However it may be building up some energy, Jones said, pointing to an “earthquake swarm” that culminated with a 5.5M earthquake on Aug. 26 preceded by nearly 200 1.4-5.3M range quakes that occurred in an area known as the Brawley Seismic Zone, which extends from the northern end of the Imperial fault to the southern end of the San Andreas Fault.

“It’s looking like it’s picking back up,” she said.

The Big One

Loss of power and water, long response times for emergency services, lack of cell phone service, massive business interruption and packed emergency rooms are among the horrors Southern California residents and businesses can expect following the big one, Jones and other experts at the forum said.

“We expect up to 100 landslides to be generated by a San Andreas earthquake,” Jones said.

Southern Californians also face dangers from liquefaction, or as Jones said, the “temporary creation of quicksand,” which she said does a “really poor job of holding up buildings.”

Citing what she called the “ShakeOut equation,” Jones said that more than 300,000 buildings may experience some form of damage – that’s one-in-16 buildings in the region. More than 300 structures could be completely collapsed, many of which are unreinforced masonry structures that local governments have been slowly vacating and tearing down over the years.

Roughly one-tenth of non-ductile concrete buildings popular in the 1950s and 1960s may collapse in the areas of highest shaking, and if it’s the type of long-period shaking that may occur from a fault the size of San Andreas, “the collapse of a pre ’94 steel frame building is conceivable,” she said.

Jones said USGS assumes roughly five high rises may collapse following a large event on the San Andreas Fault in Southern California.

A San Andreas earthquake can leave more than 150,000 people displaced, and generate 53,000 visits to emergency rooms and cause 1,800 or more deaths.

Adding to the mayhem and damage are the 1,600 fires feared possible after a large scale earthquake on the fault, particularly in East Los Angeles and North Orange County, where there are a large number of wood-frame buildings. By comparison the Northridge quake generated 100 fires.

Fires following an earthquake in Southern California could be amplified if they come during a period when the region is experiencing the annual a high-wind conditions known as the “Santa Annas,” which tend to fan flames and exacerbate the region’s wildfire season that typically comes in September and October.

“We just have to hope they don’t come together,” Jones said.

Jones also fretted over duration, as the size of a fault can determine how long a quake lasts. The duration of a “big one” on the San Andreas Fault could last 100 seconds, far longer than the damaging Northridge Earthquake’s seven seconds, she said.

Transportation systems after a large earthquake would be problematic to say the least. Rail lines from the ports of Los Angeles and Long Beach – the twin port complex is considered the third largest in the world – could be disrupted. Roughly 40 percent of the nation’s goods are delivered from those ports.

Jones said to expect $123 billion in economic losses. Direct losses are expected to generate one-fourth of the losses, with business interruption losses accounting for at least $100 billion.

The energy supply won’t only be a problem for Southern Californians following the “big one,” but according to Jones, the power supply to Western North American could be cut off for as long as 80 seconds because the grid will shut down to protect itself.

And don’t expect to depend on your cell. Cells could go out as people scramble to phone friends and relatives taxes broadband capacity, and as cell relays attached to destroyed structures go out and poke holes in cell networks.

It’s likely that even the most basic human necessity could be hard to get after the “big one.” It could take six months to get water back to Southern California, according to Jones, who added that “a small business cannot operate without water.”

Coping

I.I.I.’s Hartwig posed the question likely on the minds of many at the event: Can the insurance industry handle such a fallout?

“Yes,” Hartwig offered as an answer to his own question. “The industry can cope.”

Thanks to Jones’ speech, the Great ShakeOut event, as well as the 4.6M earthquake in Maine, which occurred just days earlier and was referenced several times during the forum, earthquakes were fresh on Hartwig’s mind as he went through catastrophic losses worldwide for 2011 and so far this year.

There have not been a great deal of cat losses in California in the last few years, but last year yielded the largest global cat loss on record, with nearly $400 billion in economic losses. That was largely due to the impact the earthquake and tsunami in Japan on March 11, 2011, had on the world’s gross domestic product, Hartwig said.

“From my calculations that shed about a half-a-point off the global GDP,” Hartwig added.

The event caused $35 to $40 billion in insured losses, according to I.I.I.

Those losses added to losses generated by the continued drought — if viewed as a single event the U.S. drought would represent a multibillion insured cat loss, according to Hartwig — as well as a plague of thunderstorms that generated tornadoes, lighting and hail in the U.S. interior, have put a great deal of pressure on the insurance industry.

“The industry has really been put to the test over the last two-three years in a way that it has never been put to the test before,” Hartwig said.

But, he noted, most valid claims got paid, there were minimal insurance company failures over the last two years and few market dislocations.

Insurer Financials

While Hartwig said insurers were prepared for disaster — insurers maintained a $567.8 billion surplus as of June 30 — he did note it’s been a few tough years in terms of finances.

“Insurers this year are on a path to generate 20 percent less on their interest portfolio than they did prior to the (financial) crisis,” Hartwig said.

Speakers at the event following Hartwig stayed focused on earthquakes, particularly the San Andreas scenario.

Stephen D’Arcy, a professor at CSFU’s Mihaylo College of Business & Economics, talked about enterprise risk management, and focused on earthquake preparedness.

Earthquake preparedness was a no-brainer topic for Danny Marshall, general counsel for CEA.

Marshall, who faulted people for sparing themselves the expense of earthquake insurance and leaving it up to the government to come in and help them during disasters, emphasized the need to be prepared.

“It’s really hard to put that toothpaste back into the tube — very expensive,” he said.

More than one speaker noted that before the Northridge Earthquake, roughly one-third of homeowners had earthquake insurance. Currently between 10 and 12 percent have earthquake insurance, according to I.I.I. estimates.

Anthony Joseph, regional director of the Western U.S. for Lloyd’s America Inc., asked a panel of insurers and reinsurers to tackle to topic of business interruption, which he put near the top of the list of concerns following an earthquake.

Comparing recent disasters in insured and largely uninsured areas, Joseph said he sees these figures growing each year.

“It’s going to be interesting to see what the contingent business interruption numbers in Thailand are going to be,” he said, referring to the flooding in the rapidly industrializing nation in 2011.

Erik Nikodem, executive vice president at Lexington Insurance Co., said that the Boston, Mass.-based American International Group (AIG) subsidiary suffered more than $300 million in losses from the Japan earthquake, the tsunami and the Thailand Floods; in line with industry estimates, 25 percent to more than one third of the losses was from contingent business interruption.

Steve Eilers, vice president of General Re, talked about the demand for earthquake insurance rising following a major event.

Following the earthquake in Japan, the number of people purchasing earthquake insurance rose 18 percent, greatly impacting that market, he said.

“We know there’s going to be a capacity crunch,” Eilers said. “In Southern California the same thing is going to happen.”

Jerry Sullivan, president of the Sullivan Group, focused on predictive modeling, and talked about how that has improved since he started in the business.

“Models are so much better than what they used to be,” Sullivan said.

To help forecast and prepare for losses that would come from a large event on the San Andreas, Sullivan and others on a brokers panel discussed the need for modeling to be made easier to understand for brokers, agents and their clients, as well as a need for better data to be provided to modelers.

The event was kicked off by Ross Pebley, LA RIMS chapter president, and Anil Puri, dean of CSUF’s Mihaylo College of Business & Economics.

Other speakers included: Kate Stillwell, product manager for EQECAT; George Yen, rating bureau chief of the California Department of Insurance; Scott Ritto, vice president of risk management for Westfield; John Zachry, a retired surplus lines executive; Frank Beuthin, senior vice president of Willis Group Holdings Plc; Yohei Miyamoto, senior vice president of Aon Risk Solutions; Curtis SeVera, managing director of Marsh and Jeff Casillas, vice president of claims for FM Global.

The event also served as an education opportunity for several students at CSFU’s Center for Insurance Studies, which has placed more than 1,000 students in jobs.

According to the center Director Weili Lu, the center currently has 900 students, and enrollment is on the rise.

Topics California Catastrophe USA Profit Loss Japan