Shake, Shake, Shake

Since California has been bogged down in a failed budget and high unemployment, state politicians have been focusing on delaying tax increases and deflecting blame. But the devastating earthquake in Haiti, along with the recent quake that caused moderate damage to parts of Humboldt County in Northern California, should serve as a reminder of a major potential crisis for this state – a major earthquake in a state with very low earthquake insurance coverage. Today, only about 12 percent of California households are covered, compared with 30 percent in 1996. Compare these figures to those of Missouri, where 35 percent of residents are covered. The percentage of California homeowners with this insurance is about the same as our state’s unemployment rate.

But the U.S. Geological Survey estimates a 67 percent chance of an earthquake 6.7 or greater in magnitude in the Los Angeles region before 2028. A group of engineers and scientists across multiple disciplines have released a study known as the Uniform California Earthquake Rupture Forecast (UCERF). The study claims that the state of California has a 99.7 percent chance of an earthquake of magnitude 6.7 or greater within the next 30 years – which is much higher than the federal figure. Understandably, Insurance Commissioner, Steve Poizner, recently urged consumers to reevaluate their individual needs for earthquake insurance.

The implications of this low rate are worrying at best. Besides the loss of life and infrastructure damage from a major earthquake, the financial damage to California residents will be severe, as they will be stuck paying for all the damage to their home. Such a low rate could lead to much greater  damage to the state’s economy. People will not buy any non-essential goods if their home is in need of major repairs. Also, because California represents 13 percent of the national GDP, the repercussions would be felt throughout the country.

Why do so few people have earthquake insurance?  As implied by my wife, any letter offering earthquake insurance would suffice. The deductible – how much the insured person(s) must pay before the insurance pays – and the annual payment are both high. The deductible ranges from 10 percent to 15 percent. This means that for a house worth $500,000, the homeowner would pay anywhere from $50,000 to $75,000 in repairs  before the insurance company would step in to help.

Meanwhile, as stated in the San Francisco Chronicle, the insurance premium for a house worth $450,000 would be $1500 to $2400 a year. Also, because it has been a while since we have had a major earthquake, people may not be worried, and thus may feel that not having insurance is worth the risk.

Instead, people have decided to invest in home improvements to protect against earthquake loss. Undoubtedly, some expect the government to bail them out if a major earthquake strikes. While some forms of home improvement are better than others at preventing damage,, no improvement would be able to prevent significant damage from a major earthquake. As for government relief, the government has grown tired of bailing out people who refuse to get insurance after numerous disasters like Hurricane Katrina. If the government provides substantive help at all, it may be in the form of loans. People will eventually have to pay the government back.

To resolve this problem, the California Earthquake Authority, a privately funded, publicly run organization supplying earthquake insurance via participating insurance companies, is supporting legislation pending in Congress to help lower premiums by 30 to 40 percent and deductibles by 50 percent. But this is probably not a priority with jobs and health care taking center stage, not to mention climate change and financial reform. Another idea is to require people to buy earthquake insurance. The rates stated above are partly a response to the high losses of $12.5 billion estimated from the 6.7 magnitude Northridge quake in 1994. But another reason the insurance rates are so high is because the only people who buy it are those can afford it and who have a lot to lose. If everyone had to buy it, insurance companies could lower the cost.

Whatever the solution might be, it will have to join the queue of the other necessary reforms  drawing the legislative, state Senate and Congressional districts in a non-partisan way, removing the two-thirds majority requirement for tax increases, removing the ballot initiatives on, repealing Proposition 13, decreasing state corporate and income taxes and so on. The line is long. But unlike the other problems these solutions are meant to solve, the politicians cannot just ignore this issue. If action is not taken before the next major quake, all that politicians will be able to offer in the aftermath is recriminations of each other – not all that helpful.

Wesley Oliphant is an economics graduate student. He can be reached at woliphan@uci.edu.