Earthquakes: Risk and Insurance Issues
An earthquake is a sudden and rapid shaking of the earth caused by the breaking and shifting of rock beneath the earth’s surface. This shaking can sometimes trigger landslides, avalanches, flash floods, fires and tsunamis. Unlike other natural disasters such as hurricanes, there are no specific seasons for earthquakes.
Earthquakes in the United States are not covered under standard homeowners or business insurance policies. Coverage is usually available for earthquake damage in the form of an endorsement to a home or business insurance policy. However, insurers that don’t sell earthquake insurance may still be impacted by these catastrophes due to losses from fire following a quake. These losses could involve claims for business interruption and additional living expenses as well. Cars and other vehicles are covered for earthquake damage under the comprehensive part of the auto insurance policy.
In the United States about 5,000 quakes strike each year. Since 1900, earthquakes have occurred in 39 states and caused damage in all 50. One of the worst catastrophes in U.S. history, the San Francisco Earthquake of 1906, would have caused insured losses of $96 billion, were the quake to hit under current economic and demographic conditions, according to AIR Worldwide.
The potential cost of earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes.
The Northridge earthquake, which struck Southern California on January 17, 1994, was the most costly quake in U.S. history, causing an estimated $44 billion in total property damage when occurred, including $24.1 billion in insured losses in 2013 dollars. The California Earthquake Authority is one of the world’s leading residential earthquake insurers, with 800,000 policies in force and 17 participating insurers. However, only about 12 percent of homeowners in California now buy earthquake coverage.
- 2013 Earthquakes Losses: Natural catastrophes and man-made disasters caused economic losses of about $140 billion in 2013, according to Swiss Re’s sigma. Insured losses were estimated at $45 billion. Insured losses from earthquakes were about $45 million, far below 2011’s record $54 billion. The largest insured earthquake loss, $25 million, resulted from a magnitude 7.0 earthquake that hit Lushan, China, in April. There were a total of 12 catastrophic earthquakes in 2013, killing 1,095 people, none of them in the United States.
- Fracking: Hydraulic fracturing, commonly known as fracking, is a drilling technique used to extract natural gas and oil from the ground. The process involves injecting large amounts of drilling fluids into wells. Critics charge that the wastewater produced by the process can cause drinking water to be polluted. But some energy companies, state authorities and environmentalists contend that poor construction of wells, rather than the process itself, is the cause of the pollution. There is, however, some evidence that fracking has contributed to an increase in the number of earthquakes. In March 2013 researchers at the University of Oklahoma, Columbia University and the U.S. Geological Survey determined that the 5.7 magnitude earthquake that hit Oklahoma in 2011 was caused by the disposal of wastewater from oil production. The findings were published in the journal Geology. In April 2012 the U.S. Geological Survey released a study that concluded that a series of earthquakes in the middle of the U.S. was the result of human activity and that fracking could be the cause. A spokesman for the U.S. Department of Interior confirmed that government scientists were seeing a significant increase of seismic activity in areas where wastewater is disposed through deep well injection but added that the quakes were relatively small and did not usually cause damage.
- Earthquake Risk and Nuclear Plant Safety in the U.S.: In January 2012 the NRC, the U.S. Department of Energy and the Electric Power Research Institute released a seismic study and model intended to help nuclear power plants in the central and eastern parts of the U.S. reassess their vulnerability to earthquakes. The study found that nuclear reactors in the region face bigger threats from big earthquakes than were previously recognized. The model, which came out of the study, replaces previous models used by the government and the nuclear power industry since the late 1980s. The NRC will require nuclear plant operators to conduct new studies for all 96 reactors in the regions.
- Studies: In a study published in Earthquake Spectra, the journal of the Earthquake Engineering Research Institute, in February 2013, scientists at the U.S. Geological Survey warn that more fatalities will result from catastrophic earthquakes this century than ever before because populations in the regions of the world prone to quakes are increasing. The researchers estimate that 21 catastrophic earthquakes with more than 50,000 fatalities will occur before the end of this century, compared with only seven quakes of such magnitude during the 20th century, and that at least 3.5 million will die, more than twice the 1.5 million killed in the 20th century.
- Earthquake Coverage: According to a 2013 survey by the Insurance Information Institute, homeowners in the Midwest are most likely to buy earthquake coverage, 22 percent; followed by the West, 11 percent; the South, 9 percent; and the Northeast, 6 percent. The survey also found that 18 percent of homeowners earning over $100,000 a year purchase earthquake insurance, compared with 6 percent of those earning less than $35,000 a year. Information on earthquake insurance losses can be found here.
- The California Earthquake Authority (CEA) was created in 1996 two years after the devastating Northridge Earthquake caused huge losses for homeowners insurers in the state. The California Legislature established the CEA as a publicly managed, largely privately funded entity. The CEA now collects about $570 million in premium each year. Its claims paying capacity exceeds $10.2 billion. The CEA has paid out only $3.6 million in losses since its inception in 1996.
- According to SNL Financial, direct premiums written for earthquake coverage in California totaled $1.6 billion in 2012, including $567 million for the CEA, the largest provider of earthquake insurance in the state (see Background). The CEA’s share of the market was about 35 percent. The CEA has some 800,000 policies in force in the state. CEA premiums vary, depending on the location and construction of the home, but the average premium in 2011 was about $750, according to the California Department of Insurance. Only about 12 percent of Californians now purchase earthquake coverage.
The chart below shows losses based on total damages (including insured and uninsured losses) when occurred. The costliest U.S. earthquake, the 1994 Northridge quake, caused $15.3 billion in insured damages when it occurred (about $24 billion in 2013 dollars). It ranks as the fifth-costliest U.S. disaster, based on insured property losses (in 2012 dollars), topped only by Hurricane Katrina, the attacks on the World Trade Center, Hurricane Andrew and Superstorm Sandy. Eight of the costliest U.S. quakes, based on inflation-adjusted insured losses, were in California, according to Munich Re. There were six earthquakes in the United States in 2013 which caused only minor damage, according to Munich Re.
THE TEN MOST COSTLY U.S. EARTHQUAKES BY INFLATION-ADJUSTED INSURED LOSSES (1)
THE TEN MOST COSTLY WORLD EARTHQUAKES AND TSUNAMIS BY INSURED LOSSES, 1980-2013 (1)
THE TEN DEADLIEST WORLD EARTHQUAKES/TSUNAMIS, 1980-2011 (1)
Japan earthquake and tsunami: On March 11, 2011 an earthquake and Tsunami struck northeast Japan, killing thousands of people and injuring many others. The tsunami was generated by a 9.0 magnitude earthquake approximately 80 miles offshore and about 230 miles northeast of Tokyo. The Japan earthquake cost the insurance industry an estimated $35 billion, a fraction of the total losses, which are now estimated at $210 billion.
Earthquake Forecasts: In April 2008 experts from the U.S. Geological Survey, USC’s Southern California Earthquake Center and the State Geological Survey released an earthquake forecast indicating that a huge quake is far more likely in Southern California than in Northern California in the next 30 years. The report also concluded that the state is virtually certain to be hit by a major earthquake by 2028. The researchers found that the chance of a 6.7 magnitude temblor, equal to the 1994 Northridge quake, is 97 percent in Southern California and 93 percent in Northern California. The likelihood of a 7.5 quake, which is 16 times more intense than a 6.7 quake, is 37 percent in Southern California and 15 percent in Northern California. The study used new information about prehistoric earthquakes, locations of faults and their slip rates, and satellite data of the movement of the Earth’s crust to calculate the likelihood of earthquakes in the state.
Insurance Coverage for Earthquakes in the United States: Standard homeowners, renters and business insurance policies do not cover damage from earthquakes. Coverage is available either in the form of an endorsement or as a separate policy for homeowners, renters and small business owners. Unlike flood insurance, earthquake coverage is available from private insurance companies rather than from the government. In California, homeowners can also get coverage from the California Earthquake Authority (CEA), a privately funded, publicly managed organization.
Earthquake insurance provides protection from the shaking and cracking that can destroy buildings and personal possessions. Coverage for other kinds of damage that may result from earthquakes, such as fire and water damage due to burst gas and water pipes, is provided by standard home and business insurance policies in most states. Cars and other vehicles are covered for earthquake damage by comprehensive insurance which also provides protection against flood and hurricane damage as well as theft.
Deductibles and Costs: Earthquake insurance carries a deductible, generally in the form of a percentage rather than a dollar amount. Deductibles can range anywhere from 2 percent to 20 percent of the replacement value of the structure. This means that if it cost $100,000 to rebuild a home and there was 2 percent deductible, the consumer would be responsible for the first $2,000 dollars. Insurers in states like Washington, Nevada and Utah, with higher than average risk of earthquakes, often set minimum deductibles at around 10 percent. In most cases, consumers can get higher deductibles to save money on earthquake premiums.
The standard CEA policy includes a deductible that is 15 percent of the home’s replacement cost. The basic policy covers only the house (other structures such as garages, pools, etc. are not covered). Personal possessions are covered up to $5,000 and “loss of use” expenses, the additional cost of living elsewhere while home repairs are made, are covered up to $1,500. Recognizing that some people want more comprehensive coverage, the CEA also offers a 10 percent deductible, insurance for other structures, personal items coverage up to $100,000 and $15,000 in “loss of use” coverage. Premiums vary widely among the 19 rating territories, based on the type of house, its age, the nature of the soil, and proximity to known fault lines. The CEA has reserves of about $9 billion.
Premiums also differ widely by location, insurer and the type of structure that is covered. Generally, older buildings cost more to insure than new ones. Wood frame structures generally benefit from lower rates than brick buildings because they tend to withstand quake stresses better. Regions are graded on a scale of 1 to 5 for likelihood of quakes, and this may be reflected in insurance rates offered in those areas. The cost of earthquake insurance is calculated on “per $1,000 basis.” For instance, a frame house in the Pacific Northwest might cost between one to three dollars per $1,000 worth of coverage, while it may cost less than fifty cents per $1,000 on the East coast.
A brick home would cost approximately $3 to $15 dollars per $1,000 in the Pacific Northwest, while it would cost between 60 to 90 cents in New York. Earthquake insurance is available from most insurance companies in most states. California law requires homeowners insurance companies to offer earthquake coverage to their homeowners insurance policyholders. Homeowners can decide to purchase it, purchase a policy from another insurer or decline it altogether.
In January 1994 the Northridge earthquake, a magnitude 6.8 quake (see section on Earthquake Measurement), struck Southern California, causing an estimated $12.5 billion in insured losses, according to ISO. The insurance industry ended up paying out more in claims for this quake than it had collected in earthquake premiums over the preceding 30 years. While no insurer became insolvent, some came very close. To recover their financial strength and to be better prepared for the next earthquake, most insurers began to limit their exposure to earthquakes by writing fewer new homeowners insurance policies. In addition, most insurers filed for both rate increases and increases in deductibles from the 10 percent that was current then to 15 percent or higher. This triggered a crisis that by mid-1996 threatened the vitality of the state’s housing market and stalled the state’s recovery from recession.
What Are Earthquakes and Where Do They Occur? An earthquake is a sudden, rapid shaking of the earth caused by the breaking and shifting of rock beneath the earth's surface. For hundreds of millions of years, the forces of plate tectonics have shaped the earth as the huge plates that form the Earth's surface move slowly over, under, and past each other.
Sometimes the movement is gradual. At other times, the plates are locked together, unable to move. When the pressure building up grows strong enough, the plates break free causing the ground to shake and rupture along fault lines, or zones of weakness.
One of the most famous faults is the San Andreas Fault, which extends about 600 miles from the Gulf of California northwest along the California coast. The 1906 San Francisco earthquake was caused by movement of the San Andreas Fault.
Quakes can produce different kinds of shaking. Some, like the 6.8 magnitude (see section on Earthquake Measurement) Northridge quake, are thrust fault quakes, which cause violent up-and-down, rather than the more common side-to-side movement. Ground shaking from earthquakes can collapse buildings and bridges as well as trigger landslides, avalanches, floods, fires, and tsunamis. Buildings with foundations resting on unconsolidated landfill and other unstable soil, and trailers and homes not tied to their foundations are at risk because they can be shaken off their mountings during an earthquake.
According to the U.S. Geological Survey, there are more than three million earthquakes worldwide each year. While the vast majority of those are a magnitude 3.9 or lower, more than 900 earthquakes measure 5.0 or higher each year. About 81 percent of the world’s largest earthquakes occur in the Circum-Pacific seismic belt. The area extends from Chile, northward along the western South American coast through Central America, Mexico, the west coast of the United States and the southern part of Alaska, through the Aleutian Islands to Japan, the Philippine Islands, New Guinea, the island groups of the Southwest Pacific and to New Zealand.
The most powerful earthquake on record occurred in Chile on May 22, 1960. The magnitude 9.5 quake caused $550 million in damage, killed more than 2,000 people and injured more than 3,000. It also caused a tsunami, which caused additional destruction in Hawaii, Japan, the Philippines and the West coast of the United States.
Earthquake Risk in the United States: The first national study of earthquake risk in the United States was released by the Federal Emergency Management Agency (FEMA) in September 2000. The study estimated that over time earthquake losses in the United States could average $4.4 billion dollars a year. This estimate includes only capital losses, such as repairing or replacing buildings, contents and inventory ($3.49 billion), and loss of income, including business interruption, rental income and wage losses ($0.93 billion). It does not cover damage and losses to critical facilities, transportation and utility lines or indirect economic losses.
The $4.4 billion estimate of probable annual earthquakes losses is close to the losses from floods and hurricanes. Flood losses averaged $5.2 billion annually during the period 1989 to 1998, according to the National Weather Service. The National Climatic Data Center estimates $5.4 billion in annual hurricane losses for the same period.
The report also points out that the potential cost of earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes. According to the study, 84 percent of the nation's annual losses are expected to occur in California, Oregon and Washington, with California accounting for the lion’s share. Other areas at risk include the central United States, within the New Madrid Seismic zone, which includes parts of Illinois, Kentucky, Tennessee, Missouri, and Arkansas, and the Charleston, South Carolina area. In addition to California metropolitan areas, cities ranked among the top 40 high-loss potential urban areas include Seattle, Portland, New York City, Salt Lake City and St. Louis.
The study pointed out the need for increased recognition of metropolitan areas with “low seismic hazard” but “high seismic risk,” such as New York City and Boston, which have high concentrations of buildings and an infrastructure that was built without taking into account seismic codes. Although the likelihood of catastrophic quakes occurring in these areas is statistically low, the potential cost is very high. In addition, because of the perception of low risk, neither the public nor the private sector has developed earthquake preparedness programs that teach people how to protect against earthquake damage and injury.
In the continental United States, earthquakes occur most frequently west of the Rocky Mountains. While the United States experiences only two percent of the world’s earthquakes, some 90 percent of its population lives in seismically active areas. Statistics show that since 1900, earthquakes have occurred in 39 states and caused damage in all 50 states. More than 3,300 Americans have died in earthquakes during the last century.
Historically, the most violent earthquakes have occurred in the central United States. The largest earthquake in the continental United States was along the New Madrid Fault in Missouri, where a three-month long series of quakes in 1811-1812 included three quakes larger than a magnitude of 8. The state with the most major earthquakes is Alaska, but the one with the most damaging earthquakes is California.
The largest earthquake in the United States was a magnitude 9.2 quake that struck Alaska on March 28, 1964. The earthquake and ensuing tsunami caused more than $500 million in property losses, according to the National Geophysical Data Center.
The most costly earthquake in the United States was the Northridge, California, earthquake of January 17, 1994, with insured losses estimated at $12.5 billion, according to ISO.
Earthquake Risk in the Western United States: Although the entire Northwest of the United States is at high risk of earthquakes, nine of the most costly earthquakes in the last century occurred in California. According to the U.S. Geological Survey, there is a 70 percent probability that an earthquake of magnitude 6.7 or larger will strike the San Francisco Bay area over the next 30 years. The San Francisco earthquake in 1906 measured 8.3 on the Richter scale and caused direct quake losses of about $24 million, as well as fire losses of about $500 million, according to the National Geophysical Data Center. Beside the 1994 Northridge quake, large, recent quakes in California include the 7.6 magnitude Landers quake in 1992 that caused $92 million dollars of insured losses, the 6.9 magnitude Eureka quake in 1992 that resulted in $66 million dollars of insured losses, and the 7.0 Loma Prieta quake in 1989 that resulted in more than $7 billion in insured losses, 62 deaths and 3,757 injuries.
Earthquake Risk in the Central United States: The New Madrid Fault zone lies within the central Mississippi valley extending from northeastern Arkansas through southeastern Missouri, western Tennessee, Kentucky and southern Illinois. The last major earthquake, magnitude 8, occurred there in 1812. But scientists warn that this was not a freak occurrence. Earthquakes in central and eastern United States affect much larger areas than earthquakes of similar magnitude in the West. For example, the San Francisco earthquake of 1906 was felt 350 miles away, whereas the New Madrid earthquake of December 1811 rang church bells in Boston, Massachusetts, 1,000 miles away.
Earthquake Risk in the Eastern United States: The largest earthquake in the East was a 7.5 temblor that struck Charleston, South Carolina, in 1886, killing over 60 people. While the risk of an earthquake in the Northeast is not nearly as high as in the West, the region is seismically active. A 6.0 earthquake struck Boston in 1755 and a 5.8 earthquake struck the northern part of New York State in 1944. Near New York City, there have been two 5.0 to 5.3 earthquakes, one in 1737 and the other in 1884. Experts say an earthquake of between 6.5 and 7.5 in possible in the Northeast, but estimate that it may occur “in the order of thousands of years.”
Applied Insurance Research, a catastrophe modeling firm, points out that large numbers of buildings in both Boston and New York City were built long before the introduction of seismic building codes. Many of the older structures in the two cities are made of unreinforced masonry, the most vulnerable to earthquake damage. Worse, much of Boston is built on artificial fill, which can amplify seismic waves by as much as a factor of three. New York is less vulnerable, being largely built on bedrock.
Earthquake Measurement: The size and magnitude of an earthquake is measured in several different ways. The Richter Scale measures the size of earthquake waves. It was developed by Charles Richter in the 1930s and is a logarithmic measurement of the amount of energy released by an earthquake, see below. The Mercalli Intensity Scale evaluates the intensity of a quake according to observed severity at specific locations. It rates the intensity on a Roman numeral scale that ranges from I to XII. Today, seismologists are using the Moment Magnitude Scale, which measures the size of the earthquake’s fault, and how much of the earth slips at the time of the quake. A number of readings are taken, averaged and then adjusted to generate numbers similar to the Richter Scale. This allows the magnitude of earthquakes measured on these new scales to be compared with earthquakes recorded earlier. According to the Moment Magnitude Scale, the severity of an earthquake is categorized as the following:
5.0 – 6.0 Moderate
6.0 – 7.0 Large
7.0 - 7.8 Major
An increase of one unit of magnitude, for example, from a 4.0 to a 5.0 quake, is a 10-fold increase in wave amplitude on a seismogram, or about a 30-fold increase in energy released. Thus, the difference between a 4.0 and a 6.0 magnitude quake would be a release of energy 900 times (30 times 30) as great as a 4.0 magnitude quake since the magnitude is a logarithmic value.
Legislation: In 1977 the United States Congress enacted the Earthquake Hazards Reduction Act, in recognition of the fact that earthquakes pose the greatest potential threat of any single-event natural hazard confronting the nation. The Act directed the President to "establish and maintain an effective earthquake hazards reduction program."
Congress then created the National Earthquake Hazards Reduction Program, which gave lead responsibility to the federal government to provide direction, coordination, research and other support to efforts aimed at earthquake hazard mitigation and preparedness. The Federal Emergency Management Agency (FEMA), the United States Geological Survey, the National Science Foundation, and the National Institute of Standards and Technology were assigned specific roles. Recommendations were included on the duties of state governments, local governments, private organizations and individuals.
Earthquake Safety/Loss Mitigation: Although earthquakes cannot be prevented, science and engineering provide tools that can be used to reduce their damage. Science can now identify, with considerable accuracy, where earthquakes are likely to occur and what forces they will generate. Engineering can help provide design and construction techniques so that buildings and other structures can survive the tremendous forces of earthquakes.
To produce estimates of earthquake loss by geographic area, FEMA uses an earthquake loss estimation methodology called Hazards U.S. (HAZUS), developed in cooperation with the National Institute of Building Sciences. The loss estimation methodology is a software program that uses mathematical formulas and information about building stock, local geology and the location and size of potential earthquakes, economic data, and other information to estimate losses from a potential earthquake. HAZUS is capable of using two separate geographic information systems (MapInfo® and ArcView®) to map and display ground shaking, the pattern of building damage, and demographic information about a community. Once the location and size of a hypothetical earthquake is identified, HAZUS will estimate the violence of ground shaking, the number of buildings damaged, the number of casualties, the amount of damage to transportation systems, disruption to the electrical and water utilities, the number of people displaced from their homes, and the estimated cost of repairing projected damage and other effects.
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