Affordable quake insurance

The earthquakes that devastated Christchurch, New Zealand, and northern Japan in quick succession have prompted many California homeowners to bolt their houses to the foundations and stock up on emergency supplies. But the ultimate in protection for their homes — earthquake insurance — remains unappealing to the vast majority of state residents. A new bill (S 637) sponsored by the state’s two U.S. senators could help remedy that by slashing the cost of coverage. It may be hard for other lawmakers, whose constituents live far from the San Andreas fault, to see why the federal government should get involved. But there’s a good reason for Congress to act, especially when the cost is little or nothing.

Insurance officials say that no more than 12% of homeowners in California pay for earthquake coverage. One reason is that the policies are expensive and impose big deductibles, meaning that policyholders won’t receive a cent unless a house suffers damage equal to 10% to 15% of its insured value. For the average Angeleno, that means paying more than $1,000 annually for a policy that doesn’t cover the first $27,500 in losses. An earthquake would have to be pretty severe to wreak that much havoc.

Premiums are high mainly because the California Earthquake Authority, the state agency that provides most of the coverage, is required to amass enough reserves to meet the claims that would be likely in a once-in-500-years disaster. Although the authority has nearly $4 billion in assets, that’s not enough. So it spends more than $220 million a year — 40 cents of every premium dollar — buying an extra layer of insurance from a third party.

The bill by Democratic Sens. Dianne Feinstein and Barbara Boxer would provide a low-cost alternative to commercial reinsurance. If an earthquake were severe enough to exhaust a state’s insurance reserves, the bill would authorize the state to issue bonds guaranteed by the federal government. The guarantee would translate into a lower interest rate on the bonds, reducing the state’s borrowing costs. To all but rule out a federal bailout, guarantees wouldn’t be available beyond an amount the Treasury Department had previously determined the state could repay. If the state needed more, it could issue bonds without guarantees. And by alleviating the need for commercial reinsurance, the state could cut earthquake premiums by at least a third.

California lawmakers have joined forces in the past with representatives of states prone to different kinds of disasters to advance broader proposals, but to no avail. Limiting the guarantees to state earthquake insurance programs may appear to narrow its constituency, but all federal taxpayers will be on the hook to help the uninsured if California is hit by a temblor the size of the one that struck Japan last week. The more people who have insurance coverage, the better off everyone will be.