Earthquake Insurance is Getting Risky

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.
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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.

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.

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.

Comments

[nickgogert]

Flock of black Swans ahead.

[WAKEUP]

"nickgogerty"... probably does not hold much stock in property and casualty insurance companies. If he/she did, they would remember a rather large black swan landing in a place called New Orleans not so long ago, after being forecast for a long time.