Paying for the Big One

Despite the near certainty of a major temblor in the coming decades, relatively few Californians insure their homes against earthquakes. That’s because the cost of the coverage is high and the value is low. Owners of modest homes in Southern California pay more than $1,000 a year for policies that won’t provide a dime in benefits unless their houses have suffered more than $30,000 or $40,000 in damages.

The high premiums reflect the cost of building financial reserves at the California Earthquake Authority, the agency that provides most of the state’s policies. More than $2 billion from the premiums collected since 1997 has gone into those reserves, but that’s still not enough to meet the projected claims from an extreme disaster. To fill the gap, the authority has bought reinsurance -- an extra layer of coverage from private companies -- at a cost to policyholders of more than $2.3 billion. But reinsurers have kept almost all of that money because claims rarely exceeded the state’s reserves.

Other states at risk of catastrophic natural disasters face a similar dilemma. In response, Rep. Loretta Sanchez (D-Garden Grove) and Sen. Bill Nelson (D-Fla.) have introduced legislation that would make it easier for states to borrow money after a once-in-a-lifetime catastrophe instead of relying on reinsurers. The bills (HR 4014 and S 886) would provide federal loan guarantees to qualified state insurance programs after an epic disaster, enabling them to borrow money cheaply (through a bond issue) to cover more losses by policyholders.

With a federal backstop, states would be able to slash payments to reinsurers, bringing premiums down sharply. The California Earthquake Authority estimates that the bill would enable it to cut premiums by more than a third and offer better coverage for a home’s contents. And if an extraordinarily damaging quake hits, the authority projects that it would be able to repay the bonds while still keeping premiums well below their current levels. The cost to taxpayers would be only a few million dollars a year.

A House Financial Services subcommittee is scheduled to hold a hearing Wednesday on a broader homeowners insurance proposal by Rep. Ron Klein (D-Fla.) that includes Sanchez and Nelson’s bills. Insurance industry lobbyists oppose the federal guarantee, arguing that it would encourage people to rely on federal help instead of preparing themselves for the worst. But that’s already the problem. Rather than carrying quake insurance, Californians are willing to bet that federal taxpayers will bail them out. The Sanchez-Nelson proposal won’t necessarily change that mentality. But by helping states make catastrophic insurance a better value, the legislation will give homeowners less reason to gamble. And the more people who can be persuaded to carry insurance, the smaller the inevitable bailout will be.