close to a major city. The loss of life
would be devastating, and the physical
destruction – most of it uninsured –
overwhelming.
Historically, the rate of uninsured
residential losses sits consistently
around 70 percent for natural disasters.
The commercial gap is less acute but
still problematic.
The largest commercial property
owners might be adequately insured
for a catastrophic loss, especially if
their lenders require it. In the event
of quake damage, they’d also be better
able to absorb the high deductible
of an earthquake policy. But many
small and medium sized businesses in
high-risk regions roll the dice and take
their chances without the coverage
they need, or carry limits too low to
facilitate recovery.
The government aid needed for
public infrastructure rebuilding,
aid to individuals and disaster loans
to businesses is increasingly high.
For the next extreme high-severity
event, it’s possible that supplemental
appropriations by Congress could
exceed the $43 billion spent in 2005
after Hurricanes Katrina, Wilma
and Rita.
So if the government is footing
the bill for infrastructure recovery,
and insurers are paying claims for the
comparative few who were adequately
covered, what about the rest? Private
loans might take up some of the slack.
But with large portions of a region’s
population displaced – in some cases
permanently – incentive to rebuild or
repair could be low. Businesses able to
physically rebound will still suffer the
loss of customers and suppliers unable
to do the same.
Rebuilding efforts, particularly for
damaged infrastructure, will help offset
job losses and spur growth. But the
effect on residential and commercial
construction will not be as robust
as it might be in areas with higher
insurance penetration.
The road back for an affected
region is often slow, especially with
high levels of uninsured losses. The
rest of the country is impacted as well.
Consider the hypothetical 8.2
earthquake. California is the largest
contributor ( 13. 3 percent) to the
U.S. economy, with $2.44 trillion
in economic output. The state’s
agriculture sector alone is a $45.3
billion dollar industry that generates at
least $100 billion in related economic
activity. Prolonged disruption of that
economy could ripple across numerous
industries. There is no precedent for a
catastrophic earthquake near a major
business center.
Trade pipelines would suffer.
Around about 20 percent of all U.S.
imports come through the Port
of Los Angeles, said Martha Bane,
managing director, Property Practice,
Gallagher. “The supply chain would
be significantly impacted … you may
not be located in Southern California,
but that one part of that widget you’re
manufacturing may be here.”
THE RIPPLE EFFECT
After Hurricane Harvey, $30 billion
of securitized commercial mortgages
landed on the watch list of analysts
and investors worried about the risk
of defaults. Of greatest concern were
the properties uninsured for flood, as
well as rental properties inadequately
covered for business interruption or
contingent business interruption losses.
That scenario would be magnified
after a catastrophic earthquake,
creating a destabilizing effect on
financial markets.
The greatest threat to security
markets “is not so much the damage
but the uncertainty coming out of
the damage,” said economist Barbara
Stewart at a Washington, D.C. forum
titled “Economic Consequences of a
Catastrophic Earthquake” held by the
National Research Council Committee
on Earthquake Engineering.
“If there is anything financial
markets cannot stand, it is uncertainty.
They can deal with good news, they
can deal with bad news, but uncertainty
is the worst.”
That’s especially true if it causes
businesses and governments to
postpone financing for critical projects
for an indefinite length of time.
Said Stewart, “What is the cost
of the things that are not done, the
projects that are not built, the activities
that are not undertaken?”
IN SEARCH OF SOLUTIONS
Increasing insurance penetration
for perils like flood and earthquake
will spread the risk and make coverage
more affordable, but that’s easier said
than done.
The nonprofit California
Earthquake Authority (CEA) has
seen an uptick of interest in the past
two years, and recently surpassed
one million policies. But the state’s
population exceeds 37 million, most of
whom live within 30 miles of an active
fault, according to CEA.
For California homeowners, going
without the coverage is simply the
smarter financial move. “It’s incredibly
expensive,” said Michael Korn,
managing principal and practice leader
Hurricane
Andrew
1992
Hurricane
Katrina
2005
Hurricane
Wilma
2005
Hurricane
Ike
2008
Superstorm
Sandy
2012
Hurricane
Harvey
2017 E
Hurricane
Irma
2017 E
U
SD
B
ill
io
n
(
i
nfla
ti
o
n-a
d
juste
d)
Losses not covered by private market
Private market losses
160
140
120
100
80
60
40
20
0
58%
42%
33%
67%
47%
53%
33%
67%
27%
73%
28%
72%
47%
53%
Source: J T Re,Bloomberg, Munich Re, RMS)
Bre;kdown of insured ;nd uninsured hurric;ne losses
“Ultimately, society pays for it either way. So do we
do it upfront in a fair and controlled manner? Or do
we do it after the fact, when we have to open up the
government coffers, and borrow money from the
global financial marketplace?”
—Thompson Mackey, risk management consultant, EPIC Insurance Brokers
“These big events are starting
to [spark] bigger discussions
in Congress about how much
money they can continue to set
aside to pay for this.”
—Tom Larsen, principal of industry solutions at
CoreLogic
