Lloyd’s sees 1906 San Francisco earthquake as a turning point

By | May 8, 2006

One of the most significant natural disasters in U.S. history, the San Francisco earthquake of 1906, rolled to its centennial anniversary April 18, 2006. One hundred years ago in San Francisco, the Earth bounced and the city collapsed; then burned. People lucky enough to survive the quake wavered at the devastation or scrambled to help people from the ruins. Then the fires came. Virtually all buildings standing in the wake of the quake fell to ensuing fires. More than 3,000 people died and half the city’s population was left homeless.

Direct quake losses totaled $24 million and fires constituted $500 million, akin to over $10 billion in today’s economy according to the National Geophysical Data Center. Of the $500 million plus in losses, 40 percent ($235 million) was insured, equivalent to $4.9 billion in 2005. Of the total insured losses, only about $180 million was paid out in claims, $3.75 billion in 2005. Many insurers could only pay a share of their actual losses.

Insurers settled approximately 100,000 claims, according to the Insurance Information Institute. British underwriters accounted for more than one fifth ($40 million), while at least 12 American insurers went bankrupt, one Austrian and one German company.

The amount paid in claims outweighed the amount of premiums from fire insurance polices that year by roughly 100 times. Though earthquake exclusions were already standard in 1906, the losses effectively wiped out the industry profit earned during the preceding 47 years.

Dynamite was used during the fires to level buildings and create firebreaks. This tactic resulted in new fires causing perhaps more damage than it prevented. The dynamited buildings were, however, covered under property policies.

The effects of the quake today
Today’s urban development in seismically active areas and non-upgraded, older buildings has increased the potential cost of earthquake damage considerably. Current loss estimates resulting from a large earthquake hitting San Francisco or other metropolitan area in the United States range from $30 billion to $200 billion.

Lloyd’s of London calculated losses at $200 billion and a cost to the insurance industry of about $60 billion.

A great variance exists as to the likelihood of this kind of quake hitting the U.S. any time soon. The USGS Earthquake Hazards Program says large earthquakes occur at intervals of about 200 years, giving a mere 2 percent chance of a 7.7 to 8.3 quake hitting the somewhere in the U.S. during the next 30 years. However, some scientists predict a 60 percent chance that a strong quake, 6.7 or higher, will hit the west coast within the next 30 years.

In commemoration of the 1906 San Francisco earthquake, Lloyd’s sponsored a dinner with the San Francisco Historical Society at the Palace Hotel, heavily damaged in the quake, where Lloyd’s Chairman Lord Peter Levene was introduced by Charlotte Schultz, wife of former Secretary of State George Schultz.

Lloyd’s also sponsored an event for the local insurance community at San Francisco’s city hall and put together a National Public Radio show called “The City Will Rise” that explores the role Lloyd’s played in the 1906 quake and offers comparisons among that quake, 9/11 and Katrina.

The early-century earthquake in San Francisco marked an important point in history for Lloyd’s. The firm cemented its reputation in the U.S. by paying all claims following the quake, while many other insurers repudiated. The III estimates insurers paid out a total of $180 million, which represented only 5 percent of total claims. Of the buildings destroyed, only 2 percent were from the quake; the rest were destroyed by fire.

Fire or shake?
Not unlike Katrina’s wind vs. water battle, in 1906 there was a fire vs. shake debate and the case of damage came into question. Insurers wanted to know whether the damage was caused by the dynamite, fire or shaking. Many insurers were paying out only 80 percent on claims on the grounds of not being able to determine the cause of losses.

Lloyd’s, however, stood fast. Thor Valdmanis, Lloyds America vice president communications, explained, “We had a leading Lloyd’s underwriter named Cuthbert Heath who cabled a San Francisco agent from London and said, ‘Pay all of our policy holders in full irrespective of the terms of their policies.'”

As the news of Lloyd’s dedication spread, its reputation enlarged. “The point in our involvement with the commemorations was to remind the States that Lloyd’s was there in 1906, we paid out the most claims after 9/11, we’re paying out more than $5 million in claims from Katrina, Rita and Wilma of last year and we’re prepared to help the United States rebuild from another severe hurricane season or other natural catastrophe. We have been in business for 300 years and we’ve seen a lot,” Valdmanis said.

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