Government Lags on Quake Insurance

During a recent trip to earthquake-devastated Mexico City I found myself wondering how American cities would respond to a similar disaster. Would private insurance and government assistance be sufficient to help stricken U.S. cities rebuild businesses and neighborhoods? The answer is no.

For example, the Federal Emergency Management Agency estimated two years ago that a repetition of the 1906 San Francisco earthquake would cause at least $40 billion in losses. Analysts said that a massive quake (8.2 on the Richter scale) along the entire San Andreas Fault would result in much more than $80 billion in damage, not counting incalculable litigation costs.

Yet America’s insurance companies have only $82 billion in total cash reserves on all types of policies.

One insurance analyst said that there are less than $5 billion worth of earthquake-insurance policies in force in California. Even though companies are required by law to offer such coverage, only about 15% of homeowners take them up on it. Coverage is so costly for businesses that most companies choose to take their chances.

Although federal and state governments have programs for disaster relief, those programs are not designed to bear the brunt of the costs stemming from a major catastrophe.

The problem has been summed up well by former California Insurance Commissioner Bruce Bunner.

“Who are we kidding here in California? We live in a state that already is anticipating what could be one of the world’s most destructive earthquakes. We can’t keep saying, ‘Let the insurance companies pay for it. Let government pay for it.’ We need to do something now,” Bunner said.

Bunner believes that states should require homeowners to carry disaster insurance and that such coverage be offered at affordable prices. Such a program, he says, would fund a reserve account that could go a long way toward helping residents and companies recover from disaster.

“If we had been requiring all (California) homeowners to pay just $30 a year since 1970, the state’s homeowners would have already accumulated about a $5-billion additional cushion,” he said. In the short term, Bunner’s proposal would not provide a bridge between the costs of a disaster and available reserves, but it would be a worthwhile start.

Until adequate reserves are built up, legislators should consider creating a federal “reinsurance” program--essentially guaranteeing insurance to the insurance industry--as the companies expand their disaster coverage. The precedent for such a program already exists. Congress offered similar “reinsurance” to protect businesses and residents in riot-stricken cities during the 1960s.

And we shouldn’t forget the role of the citizenry in protecting themselves from catastrophe and in reducing the damage that a disaster would produce.

How many homeowners in quake-prone areas know how to turn off their gas lines to prevent fires? How many employers have instigated programs to train workers to respond to an emergency?

We all tend to think that “it can’t happen here.” No doubt that’s how people living in Bhopal or near Chernobyl felt, too.