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7.1: Earthquake Insurance (Betting Against Earthquakes)

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    • 7.1.1: Some Philosophical Issues
      Should you buy earthquake insurance for your house? For your business? You own a house, and you don’t want to lose it in a fire, a flood, or an earthquake. You might take chances on the little things in life, but not your home; there’s too much at stake. Fortunately, you are contacted by a company that offers to take the risk for you—at a price. The company that takes on the risk is an insurance company, and the price you have paid is called the premium.
    • 7.1.2: A Brief Primer on Insurance
      Insurance is our social and economic way of spreading the losses of a few across the greater population. We are pretty sure our house won’t burn down, but we buy fire insurance for the peace of mind that comes from knowing that on the odd chance that it does burn down, our investment would be protected. Our insurance premium is our contribution to setting things right for those few people whose houses do burn down since the house that burns down could be our own.
    • 7.1.3: Catastrophe Insurance
      Insurance against natural catastrophes is much more complex and much less understood. The insurance market in California changed drastically after the 1989 Loma Prieta Earthquake. If a magnitude 9 earthquake struck the Cascadia Subduction Zone, the devastation would spread across a large geographic area, including many cities. As a result, an insurance company would have a large number of insured customers suffering losses in a single incident, thereby defeating the Law of Large Numbers.
    • 7.1.4: Government Intervention
      Overview State governments have already intervened in the insurance business. The state insurance commissioner must approve the rates charged by an insurance company within the state, monitor the financial strength of a company and determine its ability to pay its claims. An admitted insurance company is licensed by the insurance commissioner to do business in the state. Nonadmitted companies not licensed by the insurance commissioner can do business only through surplus line brokers.
    • 7.1.5: The Nisqually Earthquake
      At $2 billion, the Nisqually Earthquake was the most costly natural disaster in the history of Washington State. Insured losses were $305 million, about 15 percent of the total. Losses included not only damage to structures but damage to contents and loss of data. For those businesses with losses greater than $10,000, about half received earthquake insurance payments. Most small businesses repaired their damage without insurance payments.
    • 7.1.6: What to Do if You Have an Earthquake Claim
      The most important thing you can do is before the earthquake: make an inventory. List everything you own, room by room, showing the number of items, their description, age, and cost of replacement. Take photos. Keep all bills and receipts. Keep your inventory and supporting documents someplace other than your house, such as a safe deposit box. Jack Watts of State Farm Insurance Co. told me that “It is difficult to overstate the value of an inventory, photos, and receipts."
    • 7.1.7: Summary Statement and Questions for the Future
      Earthquake insurance is a high-stakes game involving insurance companies, policyholders, and in some cases, governments. A Tacoma homeowner was quoted in Business Insurance, saying “My additional premium for earthquake insurance is $768 per year. My earthquake deductible is $43,750. The more I look at this, the more it seems that my chances of having a covered loss are about zero. I’m paying $768 for this?”

    7.1: Earthquake Insurance (Betting Against Earthquakes) is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Robert S. Yeats (Open Oregon State) via source content that was edited to conform to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.