A major earthquake would produce dire effects on the nation's financial and insurance industries that would dwarf the costs associated with immediate physical damage.
Experts speaking Tuesday at an earthquake forum said a major earthquake would have a devastating impact on the U.S. financial system and could lead to insurance company failures. The meeting, organized by Enserch Engineering & Construction and the Insurance Information Institute, brought together federal and private experts in disaster preparation.Barbara Stewart, president of Stewart Economics, a consulting firm to the insurance industry, explained in an interview that second and third order effects after the physical event could be economically much worse than the initial event.
She stressed that a Midwest or East Coast earthquake could be worse
because companies have not done any disaster planning in these areas while West Coast companies have made some rudimentary plans for dealing with business interruptions.
The most difficult problems would involve the insurance industry. Insurers would have to liquidate their stocks and bonds rapidly to acquire cash for claims. Ms. Stewart said they would be dumping securities on an already unsettled market.
A $50 billion earthquake would absorb half the property/casualty industry's capital, not only impacting companies' claims-paying ability but also their capacity to assume risk, Ms. Stewart said.
The situation would dwarf the recent insurance availability crisis and create havoc in areas from liability law to home-buying because three-quarters of property/casualty insurance is purchased under mandate from states, lenders or others, Ms. Stewart said.
Sen. Albert Gore, D-Tenn., told the meeting that an 8.0 earthquake on the Richter scale could do more economic damage than a 500-point drop in the Dow. The insurance industry, the banking industry and the federal government need to look closely at a disaster's potential impoact not only on property and life but on livelihoods.
Robert L. Ketter, director of the National Center for Earthquake Engineering Research, said all 50 states are vulnerable to earthquakes and 39 have significant risk.
While the probability of a destructive earthquake within 15 to 25 years is relatively low, Mr. Ketter said, studies of a possible earthquake in the Midwest indicate a 75 percent to 95 percent chance an earthquake will occur somewhere in the eastern United States before the year 2000.
He added that the probability of an earthquake before the year 2010 is nearly 100 percent.
Mr. Ketter said a major earthquake would be accompanied by damage to transportation systems, river ports, airport facilities and utilities. Disruption of the flow of crude oil and natural gas, he said, would bring with it the potential for serious environmental contaminations.
Ms. Stewart said a California earthquake could cause a disruption of the semiconductor manufacturing industry, which would affect the production of computers, telecommunications equipment, consumer electronic goods, robots, aerospace and defense equipment.
If an earthquake occurs in the Puget Sound area, port and other transportation shutdowns would block a large proportion of America's shipments to and from Japan, Korea, Taiwan and other Far East countries, Ms. Stewart said.
She maintained that a major earthquake in the Mississippi Valley would affect interstate oil and gas pipelines and interrupt energy supplies throughout the eastern United States.
If a major financial center were affected, she added, there would be a tremendous impact on the payments system.
Ms. Stewart noted that one large California bank estimates it would take three days to affect the state's economy and five days to affect the entire country if its central data processing facility were knocked out of operation. In seven days, she said, the world economy would feel it.