A series of earthquakes similar to the New Madrid quakes of 1811/1812 could cost the insurance industry more than $150 billion, making it the costliest natural disaster to date, according to a new report by Swiss Re, “Four Earthquakes in 54 Days.”

The New Madrid fault line, situated on the borders of Missouri, Illinois, Kentucky, Tennessee and Arkansas, was hit by three major earthquakes in only two months between 1811 and 1812. Swiss Re estimates that if a similar event were to occur today, total damage could reach over $300 billion, with a loss to the insurance industry of more than $150 billion—similar to if Hurricanes Katrina and Sandy, the recent Japanese earthquake/tsunami, and the Christchurch, New Zealand earthquake all hit the same area.

Despite the risk, only 7 percent of Midwest homeowners carry earthquake insurance, Swiss Re said, explaining that many homeowners believe the coverage is too expensive, that the damage won’t meet their deductible or that they live in a “quake-free” zone.

However, the report said geological evidence suggests that earthquakes such as those of 1811/1812 are approximately a 1/500-year occurrence for the region—meaning a similar catastrophe has a roughly 10 percent chance of happening within the next 50 years.

Swiss Re said it estimated a total loss to the insurance industry by first calculating a predicted loss for each of the earthquakes as if they were isolated events and then adjusting the loss estimate to account for factors of an earthquake sequence that aren’t captured in a loss model. Finally, the company considered additional expenses that insurers and reinsurers would have from administration, management and resolution of a complex set of claims.

Swiss Re said that a number of factors added to the estimate’s complexity.

The region’s large-scale geological structure allows seismic waves to travel large distances with minimal loss of energy. In addition, the soil around the Mississippi River and its tributaries will be highly susceptible to liquefaction, a common effect of earthquake shaking where saturated soil can lose its internal strength and behave like a muddy liquid. Any construction that doesn’t have its foundations connected to the bedrock below can then lose its underlying support, causing otherwise undamaged buildings to sink into the ground or tilt to the side, roadways to collapse into sink holes, “sand blows” of pressurized mud to erupt out of the ground and even flooding.

The area has a population of 47 million and includes five major metropolitan areas—St. Louis, Memphis, Nashville, Indianapolis and Little Rock—placing a wide variety of residential and commercial buildings and infrastructure at risk.

Beyond physical damage, businesses would lose revenue while offline for an extended period of time. Damage to roads and bridges that predate modern design codes would lead to delays in the transportation of reconstruction materials and workers. Airports could be damaged by shaking and liquefaction, making the runways unsafe and delaying the arrival of experienced engineers who can assess the damage and make necessary repairs. These factors would also amplify claims for “loss of use” typically included in residential insurance.

Demand for contractors and materials would outrun supply, causing price inflation. Past U.S. natural disasters have shown that demand surge can amplify the construction cost by up to 30 percent in affected regions, the report said.

Insurance and reinsurance contracts often define deductibles and limits to apply once per event occurrence. A key consideration in estimating the insured loss for the total event sequence is whether or not the earthquakes would be interpreted as separate events. As a single event, deductibles and limits would only apply once for all combined damage. As separate events, the policyholder could be expected to pay the deductible again but recover additional limits, as each earthquake causes more damage.

Reinsurance would also be an issue, as the amount of insured loss ceded to reinsurance is influenced by how many separate events are defined. A time limit to the definition of an event is nearly always included in per occurrence reinsurance contracts, Swiss Re said. However, it may be difficult to determine which part of the loss should be assigned to each event. A disagreement in how to allocate losses in line with the contract wording could lead to expensive arbitration or litigation between the reinsurer and reinsured.

Swiss Re suggested that contract definitions of an event should be simple and clear, and that earthquakes should realistically be combined into one event if they’re close in time and space, such that damage from individual earthquakes can’t be distinguished.