Yesterday’s M6.0 earthquake which struck the northern California, Napa Valley area, the largest earthquake to strike the Bay Area in 25 years, could cause economic losses of over $1 billion, while estimates of insured losses suggest $500m to $1 billion of impact.
Update: Insured loss estimates are rising, with the highest calling for a $2.1 billion impact to insurers and reinsurers. At the same time the ILS community suggests that it expects no impact to any exposed catastrophe bonds. Read more.
The earthquake struck at 3.20am local time on Sunday, resulting in damage to homes, businesses, roads, ruptures to both gas and water mains in the area and injuries to over 100 people. A state of emergency was declared in the Napa area, but despite the widespread damage and expected business interruption, earthquake experts reminded that this is a small event in California’s earthquake potential.
The USGS estimates the potential for economic losses from what it is calling the South Napa earthquake as being over $1 billion. Its early estimate yesterday was for up to $1 billion but this has shifted to an expectation that the economic impact could reach above that level, including the expected business interruption impact to the Napa region.
The shake map above, from the USGS, shows that the Bay Area itself around San Francisco was spared much of the impact of this earthquake, despite the epicenter being very near to it. That is due to the geology and topology of the Bay Area and the location of the Bay itself, which may have helped prevent a much higher loss.
For the insurance and reinsurance industry this earthquake is expected to be more of an earnings event, likely predominantly for primary insurers operating in the region. Despite California’s high exposure to earthquakes, earthquake insurance penetration is actually quite low which will keep the final insurance industry loss down.
Risk modelling firm EQECAT is the first to provide an estimate of insured losses from this earthquake, saying:
It is expected that insured losses for this event could range from $500 million to $1 billion, however, it should be noted that there is a fair amount of uncertainty associated with this given the unknown extent of BI and contents losses, which are still being fully understood.
The insurance industry loss from this earthquake is expected to be largely from residential property damage, while the impact to Napa’s wine industry could be the factor that would tip the insurer loss over $1 billion, according to EQECAT:
Residential losses are approximately from one half to one quarter of this loss estimate. If the loss exceeds $1 billion it will be from uncertainty in commercial losses. It is anticipated that losses to the wine industry could increase this estimate. At this point in time the Napa Valley wine harvest had already begun. Had this event occurred pre-harvest these losses would have been less.
At this level, the insured losses are likely to be largely retained by primary insurers operating in the region, as well as the California Earthquake Authority which is the largest provider of earthquake cover in the state. As a result the reinsurance industry is not expected to be hit too hard by this event, although some reinsurers, like Swiss Re, write a lot of California earthquake risk.
Analysts at KBW said that the top ten companies with relative direct exposure to California earthquake written premiums are: California Earthquake Authority, Zurich, GeoVera, AIG, ACE, Swiss Re, ICW Group, Arch Capital, Chubb and Endurance.
There are, of course, many catastrophe bonds and insurance-linked securities (ILS) investors with exposure to such an event, but at this level of intensity it is not expected to significantly trouble the sector. There is, as always with any catastrophe event which approaches a billion dollar loss, the potential for some collateralized underwriters of reinsurance at ILS funds to be impacted, but any loss would be expected to be manageable at this time.
This Napa earthquake provides a reminder that California earthquake is a major peril in the catastrophe bond market. U.S. earthquake currently makes up 5.8% of outstanding cat bond risk capital, according to our data, but U.S. multi-peril cat bonds which mostly include U.S. quake risks make up 27.3% of the outstanding cat bond market, so the potential exposure to ILS is clearly large.
We will update you as more estimates of insurance and reinsurance industry losses from the South Napa earthquake emerge. There is the potential for insured loss estimates to rise above $1 billion as the true extent of residential content losses and any business interruption claims become known.
The USGS gave the following summary of the earthquake:
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The earthquake lies within a 70-km-wide (44 miles) set of major faults of the San Andreas Fault system that forms the boundary between the Pacific and North American tectonic plates. The persistent northwestward movement of the Pacific plate relative to North America primarily causes right-lateral slip across the major faults, but also causes deformation between the major faults. The ongoing complex deformation field is revealed by modern geodetic surveys and earthquake patterns as well as the regional geologic structure. The earthquake is located at the eastern shore of San Pablo Bay between two major active fault systems: the Hayward-Rodgers Creek Fault system on the west and the Concord-Green Valley Fault system on the east. The earthquake occurred near the well-known West Napa Fault, and the less well known Carneros-Franklin Faults, which juxtapose different suites of rocks. Although there are several faults in the region of the earthquake, only the West Napa Fault is known to have displaced Holocene-age sediment — which is positive evidence of surface fault rupture in the last 11,000 years.
Historically, in this region shaking sufficient to seriously damage structures at Mare Island occurred during the M6.8 1868 Hayward Fault earthquake, the M7.8 1906 San Andreas Fault earthquake, and particularly during the M6.3 1898 Mare Island earthquake. The 1898 earthquake may have occurred about 20 km (12 miles) to the northwest on the southern Rodgers Creek Fault. Even larger nearby events than the 1898 earthquake can be expected in the future. In addition, the epicentral region of this earthquake is depicted on the USGS National Seismic Hazard Maps to have a high probability of strong shaking in the future.
The earthquake is located between two major, largely strike-slip fault systems. The Hayward-Rodgers Creek Fault system, which is approximately 7 km (4 miles) west of the site, generated damaging earthquakes in 1868 and probably in 1898. The Concord-Green Valley Fault system, which is 12 km (7 miles) east of the site, produced a M5.5 earthquake in 1954; while it has not generated a large historical event, there is strong evidence for recent pre-historic activity. The 1999 Working Group on California Earthquake Probabilities (WG99, 1999) concluded that the Hayward-Rodgers Creek Fault system has a 32 percent probability of generating a large earthquake (M6.7 to 7.4) by the year 2030, and the Concord-Green Valley Fault system has a 6 percent chance of generating a large earthquake (M≥6.7) in the same time period.