By Dr Adrian Leonard
Early on 18 April 1906, an earthquake and a four-day inferno of fires following destroyed 80% of the buildings in San Francisco, California and killed about 3,000 people. One estimate puts the total cost at $500m in 1906 money, a massive 1.8% of US GDP. Twenty insurers were driven into bankruptcy, but in total 243 insurers paid claims of $225m, more than the entire profits of the US fire insurance industry for the previous 47 years combined.
The Hartford’s initial reserve was $7m, but it ultimately paid $11m. Fireman’s Fund’s claims were $11.5m, against capital of $7m. It reformed, and paid half the value of outstanding claims in new shares (ultimately a good deal). Some 43 US and 16 foreign insurers delayed claims, sometimes for years. German insurers had a particularly bad record: four simply ignored the claims and left the US. British companies had the largest share of the losses. London’s indemnity bill was about £23m, or $108m in local money.
The Times calculated total British insurers’ losses at $87.9m, excluding Lloyd’s. The Economist judged the numbers ‘largely in the nature of conjecture’. It is not clear how much the catastrophe cost Lloyd’s underwriters, although one modern source puts the figure at an astonishing £50m, which seems impossibly high. Many of the risks covered were the same sort insured in the US by Lloyd’s today: $314,000 on Mrs. A.D. Huntingdon’s art gallery, $290,000 on the Emporium, a leading department store, and $144,000 on another, called the White House.
The earthquake had a major, positive impact on Lloyd’s and the wider British insurance sector. It cemented the market’s reputation as a reliable insurer. Cuthbert Heath’s syndicate of twenty Names led Lloyd’s international earthquake policies (based on rates in his handwritten ‘Earthquake Book’, still held in Lloyd’s vaults). Famously, Heath cabled his agent in San Francisco with the simple instruction to ‘Pay all our policy-holders in full irrespective of the terms of their policies.’ His agents set up makeshift stalls in the streets of San Francisco to sell ‘aftershock insurance’. Heath Names shared an average profit of £431 on the year. Lloyd’s reputation in the United States was made.
Twenty years later, a small hurricane caused severe damage in Florida. Barron’s, the U.S. financial newspaper, wrote: ‘Whatever the insurance loss may be, it will be met without quibble. When the San Francisco disaster occurred fire insurance was made, or underwritten, primarily by English companies. But German firms, with headquarters in Hamburg, had cut into the business, offering more favourable terms in the matter of premium. The English companies honourably paid their claims without quibbling about the earthquake. The Hamburg insurance companies pleaded what the old sea policies called “the act of God or the King’s enemies” or, in other words, claimed that the earthquake relieved them from the fire risk.’
Another outcome of the San Francisco earthquake was equally market-changing. Reinsurance had been limited to individual risks and proportional treaties. Led by the Hartford, US companies travelled to London to seek new ways of reinsuring calamitous accumulations of loss to their own portfolios. In direct response, Heath invented excess of loss reinsurance. Already, it seems, London was recognised as the world’s insurance laboratory.