Surprisingly, only about 12% of insured households in California currently have earthquake insurance. For such an quake-prone area, 12% is just not enough and, luckily, a new initiative may provide a sharp increase in the number of households with coverage against such catastrophes.
According to a RAND Corporation study, a proposal for the federal government to support state-run catastrophe insurance programs would increase the number of people buying earthquake coverage in California. The plan would also lower both uninsured losses and government assistance following a major quake. The four main tenents of the Catastrophe Obligation Guarantee Act (COGA) are:
- lower insurance costs
- more households with earthquake insurance coverage
- decrease in uninsured losses
- decrease in demand for federal disaster assistance
The RAND Corporation’s study estimates that lower premiums will produce a 13.2% increase in the purchase of earthquake insurance from the California Earthquake Authority, the privately-funded organization that provides earthquake insurance to the state’s residents.
“While catastrophe obligation guarantees could substantially reduce earthquake insurance costs in California, they would ultimately have a modest effect on decreasing uninsured losses and reducing the amount of disaster assistance spending.” said Tom LaTourrette, lead author of the study and a senior physical scientist with RAND, a nonprofit research organization.
So, though the study predicts an increase in the purchase of earthquake insurance, a substantial portion of earthquake losses are expected to fall below policy deductibles. Thus, an increase in coverage would translate to “less than a 1% increase” in the amount of losses that would be reimbursed. So while COGA is expected to decrease the amount of uninsured losses after a California quake, it is not a total solution. The study suggests that officials consider other avenues for increasing earthquake insurance coverage, such as public education and marketing and new, more attractive earthquake insurance products.Risk Management Magazine and Risk Management Monitor. Copyright 2013 Risk and Insurance Management Society, Inc. All rights reserved.