Earthquake Insurance Threat

Earthquake insurance is an expensive proposition, at least it seems that way to the vast majority that decide to do without it. Let's see if we can quantify the risks, starting with Forecast: Big quake likely in California.

California faces an almost certain risk of being rocked by a strong earthquake by 2037, scientists said Monday in the first statewide temblor forecast.

New calculations reveal there is a 99.7 percent chance a magnitude 6.7 quake or larger will strike in the next 30 years. The odds of such an event are higher in Southern California than Northern California, 97 percent versus 93 percent.

"It basically guarantees it's going to happen," said Ned Field, a geophysicist with the U.S. Geological Survey in Pasadena and lead author of the report.

"A big earthquake can happen tomorrow or it can happen 10 years from now," said Tom Jordan, director of the earthquake center, which is headquartered at the University of Southern California.

Researchers also calculated the statewide probabilities for larger temblors over the same time period. Among their findings: There is a 94 percent chance of a magnitude 7 shock or larger; a 46 percent chance of a magnitude 7.5 and a 4.5 percent chance of a magnitude 8.

The northern San Andreas produced the 1906 San Francisco earthquake, but the southernmost segment has not popped in more than three centuries.

Scientists are also concerned about the Hayward and San Jacinto faults, which have a 31 percent chance of producing a Northridge-size temblor in the next 30 years. The Hayward fault runs through densely populated cities in the San Francisco Bay Area. The San Jacinto fault bisects the fast-growing city of San Bernardino east of Los Angeles.

Earthquake Insurance Expensive, Risky Business

The San Francisco Chronicle is writing Earthquake insurance in the Bay Area is expensive, risky business.

Statewide, only 12 percent of California homeowners have earthquake coverage, according to the California Earthquake Authority, a publicly managed entity that sells policies through private companies. The number of Bay Area homeowners with coverage is even lower than that.

Someone who paid $700,000 for a home might insure the home for $450,000 - the cost of rebuilding the home from the ground up, he said. Annual premiums for such a policy would typically cost $1,500 to $2,400 a year in the Bay Area, Wehde said.

That's as much as the average homeowner's policy, he said.

Homeowners trying to decide whether to buy earthquake coverage might consider how much equity they have in their homes, said Comerio, the Berkeley professor.

"If you own more of your home than the bank, you stand to lose more in a catastrophic loss," she said. "It makes sense to link insurance with your equity status."

And should the Big One rock the Bay Area, a 15 percent deductible might not seem so bad, said Allstate's Halberg. "I'd urge you to compare a 15 percent deductible to 100 percent. For many of us, our, home is the single biggest and most significant investment we have. In terms of protecting that from a catastrophe that everybody says is not an if, but a when, it seems pretty reasonable."

Institutional Threat

"TC", a claims manager in the insurance industry writes:

The San Francisco Chronicle's numbers are from last October. When I discussed the issue last week with our Insurance Commissioner I was informed only 11% of Californians carry earthquake (EQ) insurance and consequently only about 15% of outstanding loan balances are insured for a CA EQ.

So if lenders are having trouble today with Californians walking away and leaving them with a property worth 80 cents on the dollar, how can the lenders survive when tens of thousands of homes are decimated by EQ damage and they become worth just a few cents on the dollar? Obviously, CA homeowners would walk away in masses and leave financial institutions holding the bag.

Of equal importance why don't lenders mandate EQ insurance in high risk areas? They certainly wouldn't underwrite a mortgage without Fire Insurance and they definitely won't underwrite a mortgage in a "flood zone" without Federal Flood Insurance. So why not mandate EQ insurance? My best guess is because it has been 15 years since the last "big one" occurred.

Some of this risk has been recognized by our CA Insurance Commissioner Steve Poisner and consequently he has very recently set up a committee to look into mandating EQ insurance in high risk areas (EQ insurance in CA is sold through the semi-public California Earthquake Authority). However, with a depressed housing market he doesn't sound too eager to mandate that Californians purchase a $1000+/per year policy.

I should also mention this isn't simply a residential housing problem. Most commercial loans also don't carry EQ insurance, with a huge potential for dire financial scenarios.

Willingness to forgo insurance is yet another unseen effect of 0% down payments in California. Many are deciding to skip coverage because the likelihood in any one year is small and it is the lending institution at risk not the homeowner. Institutional risk to "the big one" is extremely high.
" it's going to happen," said Ned Field, a geophysicist with the U.S. Geological Survey in Pasadena and lead author of the report.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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