On Shaky Ground

There have been a lot of rumblings lately — with scientists recording earthquakes in Nevada, Oregon and throughout the Midwest ranging from magnitudes 4.7 to 5.4. The U.S. Geological survey recently noted that earthquakes remain a serious threat in 46 of the United States. To further emphasize that the continent could shake, rattle and roll at any time, San Francisco recently celebrated the anniversary of The Great 1906 Earthquake and Fire, recognized as one of the worst natural disasters in U.S. history with an economic impact on par with the Hurricane Katrina disaster. (See Insurance Journal‘s earthquake coverage beginning on page 64.)

When such events occur, they remind the insurance industry and consumers of the potential devastating impacts an earthquake could have on homes and businesses. Insurance industry officials have dubbed the recent shakings wakeup calls, and are warning consumers to be prepared while lamenting the fact that few people purchase earthquake insurance.

According to the Insurance Information Institute, in California, 12 percent of residential policies and 11 percent of commercial packages have earthquake coverage. The figure is down from the 31.4 percent of total residential and commercial policies combined in 1996, just two years after California’s Northridge earthquake.

The Insurance Information Network of California indicated that figure could prove catastrophic if a “big one” strikes. The burden of picking up the pieces would fall on individuals — and most likely taxpayers, if governments need to step in to help with the recovery.

However, perhaps the burden of picking up the pieces should fall on the industry as well. It doesn’t take a rocket scientist, or geologist for that matter, to figure out that one of the main reasons take-up rates for earthquake policies are so low are that consumers perceive the costs of earthquake coverage and their deductibles to be too high.

I.I.I. noted that deductibles normally are in the form of a percentage, ranging from 2 percent to 20 percent of a structure’s value. In California, the deductible is 10 percent or 15 percent. So if it costs $500,000 to rebuild a home and there is a 10 percent deductible, the policyholder would be responsible for the first $50,000 in repairs.

Most consumers are admittedly not actuarial scientists, so they don’t understand the calculations behind setting earthquake insurance rates. But the law of supply and demand seemingly indicates that if insurers lowered the cost of coverage, more people would consider purchasing it. And from a layman’s point of view, there doesn’t seem to be a solid need for coverage. Consumers could potentially reap better rewards, given earthquake policies’ high rates and deductibles, by investing money in the financial markets over several years instead of using those same dollars to purchase annual earthquake coverage.

There’s no denying earthquake insurance needs a more solid footing among consumers. But perhaps the wakeup call about coverage needs should be directed toward the industry itself. If insurers want consumers to be prepared for a big one, they might need to shake things up a bit and reassess how policies are priced and sold.

Topics California Catastrophe USA