200 years ago today, the first of three devastating New Madrid earthquakes struck the Central U.S. Some say these earthquakes rang church bells in Boston and caused the Mississippi to run backward. Of course this was before ShakeMap, YouTube, and Twitter. Many facts remain in dispute, but no one doubts it would be much different today.
If New Madrid Happened Today
A recurrence today would impact a vastly more populated and economically developed region. Memphis and St. Louis stand squarely within the target zone. Both the loss of life and economic loss could prove staggering. With high insurance penetration, an earthquake could generate tremendous insured losses—even with the implementation of earthquake resistant building codes.
The good news is that today’s catastrophe modeling as well as market pricing for reinsurance, ILWs and cat bonds imply an infrequent recurrence of the 1811-1812 sequence.
Many companies in the region manage their capital to withstand much less severe natural catastrophe events. Especially given recent experience, they focus more on the impact of tornado, wind, and hail events.
For those who do plan to survive a New Madrid recurrence, collateralized ILWs and cat bonds offer enhanced market security, which is particularly important for such large industry events, with potential multi-line aggregation (property, workers’ compensation, and life). We often see New Madrid earthquake risk contained within broader collateralized products for just this reason. We have even seen standalone cat bonds such as the Domestic Inc. for Kemper and Merna Re II for State Farm.
Perhaps today’s anniversary will remind people not only of the potential for large New Madrid earthquakes but also of the tools available to manage this and similar extraordinary risks.
Willis Capital Markets & Advisory (WCMA) is a marketing name used by Willis Securities, Inc. (WSI), a licensed broker dealer registered with the U.S. Securities and Exchange Commission and member of FINRA and SIPC, and Willis Capital Markets & Advisory Limited (WCMAL), an investment business authorized and regulated by the UK Financial Services Authority. Both WSI and WCMAL are Willis Group (Willis) companies. Securities products are offered in the U.S. through WSI and in the U.K. through WCMAL. Readers should not place any reliance on any forward-looking statements, noted by such words as “should,” “may,” “expect” and “believe” contained herein. WCMA is not providing any advice on tax, legal or accounting matters and the recipient should seek the advice of its own professional advisors for such matters. Nothing in this communication constitutes any legal or financial advice or an offer or solicitation to sell or purchase any securities. Information contained in this communication is based on sources believed to be reliable, but no representation is being made as to the accuracy or completeness of such information. Unless otherwise indicated, any information contained in this communication is as of its date only and is subject to change.