Earthquake insurance is a high-stakes game involving insurance companies, policyholders, and in some cases, governments. Because earthquakes are so rare at a given location (in a human time frame, at least), consumers tend to underestimate the need for catastrophic coverage. 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?”
The demand for earthquake insurance shoots up after a catastrophic earthquake at the same time the willingness and capacity of insurance companies to offer such insurance sharply decreases. Insurance is, after all, a business, and for the business to succeed, it must make money.
Insurance companies might underestimate the premiums they should charge in a region like the Pacific Northwest, where a catastrophic earthquake (a subduction-zone or Seattle Fault earthquake rather than a Nisqually Earthquake) has not occurred in nearly two hundred years of recordkeeping. But premiums might be priced too high to attract customers in places that have recently suffered major losses, such as the San Fernando Valley or the San Francisco Bay Area. Indeed, the entire state of California might be in this fix. The CEA offers a policy with reduced coverage and higher premiums, which causes many people to drop their earthquake insurance altogether. Yet many underwriters in the insurance industry are still not convinced that the reduced policy is cost-based.
The quality of construction, particularly measures taken against earthquake shaking, will have an increasing impact on premium costs. The Institute of Building and Home Safety (IBHS), an association of insurance companies, has an Earthquake Peril Committee whose goal is the reduction of potential losses. This includes discouraging developers from building in areas at risk from earthquakes and other natural disasters. If a project is awarded an IBHS Seal of Approval, it might be eligible for hazard reduction benefits, including lower premiums.
Recently, the legislatures of Oregon and Washington have funded resilience studies to estimate what it would take to reduce the huge risk faced from a subduction-zone earthquake. Much of the analysis concerns hospitals, businesses, command centers, and lifelines, including water lines, fiber-optic cables, and bridges. Among the concerns: what happens if a business on the coast cannot return to profitability because it is unable to get its products to market, in which case the business might relocate to a safer area less at risk from earthquakes. The resilience survey for Oregon examined all major bridges and concluded that many of these bridges are obsolete and would be likely to fail in a subduction-zone earthquake. Despite this evidence, the 2015 legislature failed to pass a transportation bill that would have begun to address this problem.
California has already done similar studies, including its part of the Cascadia Subduction Zone. These results have been presented to the respective legislatures, but state governments have yet to commit sufficient resources to significantly reduce the risk. Were they to do so, the risk exposure to insurance companies would change dramatically. For summaries, see CREW (2013) and summaries for Oregon and Washington in the References.
The federal government still has not determined what its role should be, and the government responses to Hurricanes Katrina and Sandy are not encouraging. What should the general taxpayer be required to contribute? Should FEMA’s efforts include not simply relief but recovery? Aid in reconstruction rather than low-interest loans? Should earthquake insurance be mandatory for properties in which the mortgage is federally guaranteed? Should it be subsidized by the government, particularly for low-income families who are most likely to live in seismically dangerous housing but cannot afford the premiums if they are truly cost-based? The unattractiveness of the CEA mini-policy is causing many Californians to drop all earthquake coverage, which raises a new problem for the finance industry. Thousands of uninsured homeowners might simply walk away from their mortgages and declare bankruptcy if their uninsured homes are destroyed by an earthquake.
Problems such as these tend to be ignored by the public and by the government except in the time immediately following an earthquake. There is a narrow time window (teachable moment) for the adoption of mitigation measures and the consideration of ways to deal with catastrophic losses, including earthquake insurance. Authorized by their legislatures, both Oregon and Washington have designed resilience plans, but the price of resilience is steep, and thus far the governing bodies have not come up with the money to become resilient. The taxpayer appears to be willing to go along with this lack of action.
The question about earthquake damage is: who pays? This question has not been answered.
Suggestions for Further Reading
California Department of Conservation. 1990. Seismic Hazard Information Needs of the Insurance Industry, Local Government, and Property Owners of California. California Department of Conservation Special Publication 108.
Cascadia Region Earthquake Workgroup (CREW), 2013: Cascadia Subduction Zone Earthquakes: a magnitude 9.0 earthquake scenario, update 2013, 23 p.
Insurance Service Office, Inc. 1996. Homeowners insurance: Threats from without, weakness within. ISO Insurance Issues Series, 62 p.
Kunreuther, H., and R. J. Roth, Sr. 1998. Paying the Price: The Status and Role of Insurance against Natural Disasters in the United States. Washington, D.C.: Joseph Henry Press.
Oregon Seismic Safety Policy Advisory Commission (OSSPAC), 2013, The Oregon Resilience Plan: Reducing Risk and Improving Recovery for the Next Cascadia Earthquake and Tsunami: http://www.oregon.gov/OMD/ OEM/Pages/index/aspx, summary 8 p.
Palm, R., and J. Carroll. 1998. Illusions of Safety: Cultural and Earthquake Hazard Response in California and Japan. Boulder, CO, Westview Press.
Roth, R. J., Jr. 1997. Earthquake basics: Insurance: What are the principles of insuring natural disasters? Earthquake Engineering Research Institute publication.
Washington State Seismic Safety Committee, Emergency Management Council, 2012, Resilient Washington State, a framework for minimizing loss and improving statewide recovery after an earthquake: Final report and recommendations: Division of Geology and earth Resources, Information Circular 114, 38 p.