25 Years Later—What If the M6.7 Northridge Earthquake Were to Strike Again?

Although California had experienced major earthquakes before, the Northridge earthquake marked a turning point in the history of California's earthquake insurance industry. Insured losses for the Northridge earthquake totaled USD 12.5 billion—substantially more than the amount of earthquake insurance premiums collected during the previous 80 years.

What if the Northridge earthquake were to recur?

What if an M6.7 earthquake strikes in Orange County, California?

How would this M6.7 earthquake impact the ILS market?

A major earthquake striking Orange County—or any metropolitan area in California—would prompt immediate activity in the marketplace for insurance-linked securities (ILS): catastrophe bonds, industry loss warranties, sidecars, and collateralized reinsurance. To project potential ILS losses for catastrophic events, AIR, the leading modeling firm in the ILS market, builds and maintains a detailed catastrophe bond database containing all bonds currently on-risk, representing approximately USD 29 billion of outstanding principal.

For this M6.7 earthquake on the San Joaquin Hills Fault, we project a total loss to the cat bond market principal of USD 2.6 billion. Of the catastrophe bonds currently in the market, 13 would be impacted.

Bonds Affected

Bonds affected: 13

Tranches Taking Losses

Tranches taking losses: 16

Bonds Affected

Tranches completely exhausted: 7

Modeled loss to cat bond market principal:

Tranches Taking Losses
USD 2.6B

Northridge and the promise of catastrophe modeling

It is important to prepare for a wide range of scenarios in order to respond effectively when disaster strikes. The scenario outlined here is just one of many plausible high loss earthquake scenarios that could occur in California.

The understanding of seismicity, ground motion, and engineering have improved in the past 25 years, and advances in technology have allowed catastrophe models to make sense of high-resolution hazard information (such as soil type and liquefaction potential). More than ever, companies are better equipped to develop viable insurance products, and to make better portfolio optimization and reinsurance purchasing decisions.

1 Modeled losses for the Northridge earthquake today and for an M6.7 earthquake striking Orange County (shown elsewhere on this webpage) are based on today’s building inventory. The losses assume that 20% of shake losses to homes are insured against shake damage but that only 17% of small businesses and large commercial properties are covered. The loss estimates include the expected increases in the costs of labor and materials necessary to repair or rebuild properties in the aftermath of a large earthquake. The loss for the stochastic event is for buildings and contents damage and loss of use (i.e., time element which is a result of business interruption or additional living expenses due to relocation costs or temporary lodging). considering all the contributing sub-perils of ground shaking, fire following, liquefaction, landslide, and sprinkler damage.

* Map Sources: Esri, USGS, NGA, NASA, CGIAR, N Robinson, NCEAS, NLS, OS, NMA, Geodatastyrelsen, Rijkswaterstaat, GSA, Geoland, FEMA, Intermap and the GIS user community



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