Learning curve: improvements in science and technology over the past century have made the industry more capable of predicting and responding to natural catastrophes.

This year, the nation commemorates the 100th anniversary of the Great San Francisco Earthquake and Fire of 1906, one of America's largest insured catastrophes. The earthquake had a rupture length of almost 300 miles, measured a record 7.8 on the moment-magnitude scale, and, together with the massive fires that followed, took more than 3,000 lives. In the end, damage from fire far outstripped the original quake damage. The National Oceanic and Atmospheric Administration estimates property damage at $400 million--upwards of $7 billion in today's dollars--with more than 28,000 buildings destroyed.

Though the earthquake devastated the city and its people, it could have been worse--especially from an insurance perspective.

The Great Chicago Fire 35 years earlier had caught the nation off guard; only about half the estimated $196 million in property losses was covered by insurance. In 1906 San Francisco, however, two-thirds of the affected property was insured. Of the 202 insurance companies involved in the Chicago fire, 68 carriers--about one in three--failed, and only 25% paid their claims in full. Yet after the San Francisco earthquake and fire, only 20 of the 243 insurers involved failed. That's less than one in 12; about 90% of claims were paid, with most carriers paying in full.

Obviously, in the 35 years between those two disasters more of the public had learned the value of insurance. More importantly, the insurance industry had learned more about underwriting. And over the past 100 years, we have continued to learn how to do our work better, relying in large part on science and technology to meet the challenges of natural and man-made disasters.

Science has been a tremendous force in virtually all aspects of underwriting for a long time as various groups attempt to record, study and predict what could happen.

According to the U.S. Geological Survey, a seismograph in Gottingen, Germany, that had recorded the 1906 San Francisco earthquake also measured the Loma Prieta Earthquake that struck San Francisco in 1989; it measured 7.0 on the moment-magnitude scale. Then using additional information from the Loma Prieta quake, scientists were able to infer that the 1906 San Francisco quake released between 16 and 30 times more energy than Loma Prieta.

Andrew C. Lawson, then chairman of the geology department at the University of California, led a team of scientists who studied the effects of the 1906 quake. Their 1908 report, released a half-century before the theory of plate tectonics, found soil type is an important determinant of loss from an earthquake. Soil type still is a valid factor in underwriting.

Today technology plays a major part in every aspect of catastrophe underwriting, from modeling to granularity in pricing. Catastrophe modeling uses technology to apply a quantifiable and scientific approach to potential losses; models have grown increasingly sophisticated through the use of many more attributes. They are used for rate making and managing aggregate risk. And because the models are a relative measure, companies use them to negotiate reinsurance, and rating organizations employ them when they evaluate insurers.

Change also has come on the political front. In recent years, there's been the emergence of government involvement in earthquake insurance and mitigation. While earthquake insurance is not part of a standard homeowners policy, after the 1994 Northridge earthquake, some insurers were concerned about offering it as an endorsement or additional policy in California. State regulators in 1996 established the California Earthquake Authority, a privately-funded, publicly-managed partnership, as an alternative.

Over the past century, demographic shifts have included increased concentration of businesses, property and people in coastal areas. In some places there's been improved building engineering and tougher building codes, though some older cities still contain a major concentration of structures built before modern codes.

Reinsurance markets have also changed, becoming more sophisticated. Underwriting members of Lloyd's essentially reinsured the San Francisco earthquake. Today, insurers spread their book around the world and have different types of reinsurance mechanisms available, including risk-linked securities and catastrophe bonds.

Through much change, insurers continue to underwrite and usually do it well, by incorporating the best of all the scientific, technological, mathematical and political disciplines. The rating companies have continued to improve their insurer evaluation tools, and now employ risk-based capital assessments to assure policyholders that insurance carriers will be there to keep the promises--just as we did in 1906.

Judy Blades, a Best's Review columnist, is senior executive vice president for property-casualty at The Hartford Financial Services Group Inc. She can be reached at [e-mail].