Shaky earthquake policy: time to shift to action

The US Geological Survey recently estimated the 30-year likelihood of a 6.7 or greater earthquake in California is greater than 99 percent, with a 93 percent chance that it will exceed 7.0. The San Francisco Bay area and the Los Angeles basin are also susceptible to landslides and soil liquefaction, which enhance earthquake damage and would likely affect gas, sewer and water lines and the road system. If the San Francisco Earthquake of 1906 were to hit under current economic and demographic conditions, it would cause insured losses of $50 to $120 billion, with total economic losses potentially exceeding $250 billion.

This is not just a concern in California. Nearly 50 percent of the US population lives in earthquake-prone regions. Forty-two of the 50 states have a reasonable chance of experiencing damage from an earthquake within the next 50 years.

With so much at stake across the US, government is not—but should be—proactively managing this risk. First, government should ensure that building codes and building code enforcement are risk-appropriate to minimise post-earthquake damages in risk-prone areas. This includes not only appropriate standards for new construction but also retrofitting existing structures which represent significant risk.

Government should also incentivise risk mitigation by both the private and public sectors. For example, the California’s Earthquake Authority, the state-run entity that is the largest provider of earthquake insurance in the US, is providing grants to homeowners to strengthen the foundations of existing homes.

Second, at-risk communities need to plan for their own financial resilience and how they will be able to provide an appropriate level of essential government services after an event. While some federal resources are available, federal aid does not cover all costs—states and municipalities are responsible for approximately 25 percent.

Third, government needs to encourage the purchase of private insurance. Most homeowners in earthquake-prone areas do not have insurance for earthquake damage, which is not covered by their homeowners’ policy. Earthquake insurance (unlike flood insurance) is not required to obtain a federally-backed mortgage—Freddie Mac and Fannie Mae (and thus the US. taxpayer) are assuming this risk.

Only an approximate 12 percent of Californians purchase earthquake insurance. This low figure may be attributable in part to the misperception that the federal government will provide significant resources to help them recover. In reality, most federal spending goes towards uninsured community infrastructure damage and other government needs and funds for individual assistance are needs-based and relatively modest (averaging approximately $5,000).

The low level of insurance utilisation can have broader implications for the economy, resulting from mortgage defaults, business failures, bank and financial institution stress, and increased federal debt. This risk can be reduced through pre-disaster evaluation and planning that includes strengthening of infrastructure, commercial and residential properties to limit earthquake damage.

The broader impact can be managed and reduced through greater use of insurance spread throughout the global insurance and reinsurance market. Rather than self-insuring and suppressing economic growth through debt, communities that have utilised this strategy have received an economic stimulus from the claims payments and their economies recovered much more quickly.

For example, after the 2011 New Zealand earthquake, total economic losses were approximately $24 billion. Due to high insurance utilisation, $17 billion was insured, with reinsurers paying 73 percent. Juxtapose this against the 2011 Japanese tsunami, which resulted in $210 billion in economic losses with only $40 billion insured.

The uninsured and under-insured earthquake peril presents a potentially significant risk to banks, taxpayers and the economy as a whole. Fortunately, there is substantial reinsurance capacity to help absorb this risk. Reinsurers view US earthquake risk as an insurable peril and are willing to help consumers, insurers, and government entities to manage and transfer their risk and rebuild their lives.

Matthew Wulf is vice president, state relations at the Reinsurance Association of America. He can be contacted at: wulf@reinsurance.org

Dennis Burke is vice president, state relations at the Reinsurance Association of America. He can be contacted at: burke@reinsurance.org