Imagine the same magnitude earthquake that pummeled Haiti striking greater Los Angeles, San Francisco, Portland or Seattle. Are enough people insured for this event? Are there enough skilled adjusters ready for the valuation issues specific to earthquake damage? While there is almost no private insurance in Haiti providing a financial buffer from its earthquake disaster, many along our Western coast do not appear willing to insure for this peril.
The possibility of the earthquake event that happened in Haiti was anticipated. The World Bank provided Haiti a loan to pay natural catastrophe insurance premiums starting in 2007:
The Haiti Catastrophe Insurance Project’s objective is to reduce Haiti’s financial vulnerability to natural disasters through insurance coverage against earthquakes and hurricanes. This will be achieved by providing financing to Haiti to allow it to join the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and purchase financial protection against catastrophic earthquake and/or hurricane events. Without the IDA grant, it is unlikely that Haiti would join this pilot initiative, which represents the first entity created to protect small island states from the financial impact of natural disasters. The project has two main components with the first being to assist Haiti in joining the CCRIF through the financing of the entrance fee. This fee is equal to the first year’s insurance premium of US $2.57 million. The second project component is payment of annual insurance premium which will assist Haiti in purchasing the catastrophe insurance coverage offered by the CCRIF during the first three years. As such, the project supports the establishment and viability of the CCRIF.
The sad truth is that poor countries and poor people usually have no or little insurance. In this case, as indicated in a Wall Street Journal article, Haiti Insurance Coverage Expected To Be Far Short Of Losses, only multinational corporations were expected to have any significant earthquake coverage. The insurance fund supported by the World Bank apparently has only $8 million:
Haiti will likely receive some help from its main catastrophe insurer, the Caribbean Catastrophe Risk Insurance Facility, a regional fund administered by participating governments. A spokesman said that Haiti’s earthquake coverage is up to $8 million, which would be paid from the fund in about 14 days, once the earthquake is categorized. The spokesman said he knows of little private insurance coverage in Haiti.
Devastating earthquakes will happen in the United States. Most vulnerable are California, Oregon, and Washington. The only question is “when.” I bet that many in those areas are taking the news from Haiti as a wakeup call, as indicated in an article from Oregon, Only 20 percent of Oregonians have quake insurance:
“As we offer our support and help to the victims of the Haiti earthquake, Oregonians may also be thinking about how to protect themselves in the event of an earthquake.
Although Oregon is among the states at highest risk for a major earthquake, only about 20 percent of Oregonians have earthquake insurance, according to a Department of Consumer and Business Services survey.
Standard homeowner policies do not cover earthquakes but optional earthquake coverage is readily available and relatively inexpensive, the 2009 survey indicated.
“Consumers may want to think about their ability to rebuild if their house is destroyed in an earthquake,” said Cory Streisinger, director of the Department of Consumer and Business Services. “Insurance should be weighed as part of other earthquake preparations.”
• Homeowners generally can buy earthquake insurance as an endorsement (addition to their policy) or as a separate policy. The few companies that do not offer earthquake insurance in Oregon typically refer clients to a company that sells stand-alone earthquake policies.
• Earthquake coverage is relatively inexpensive – often less than $300 a year for a $300,000 wood-frame home. Masonry homes are more expensive to insure. And, if you live in an older home, you may need to bolt your home to the foundation or make other seismic upgrades before you can buy earthquake insurance.
• To keep premiums low and because it is designed to cover catastrophic loss, earthquake coverage generally features high deductibles. These typically amount to 10 percent or 15 percent of the amount covered by insurance. A homeowner with a house insured for $300,000 and a 10 percent deductible would pay $30,000 before the policy would pay. Coverage for contents is separate.
Studies by the Federal Emergency Management Agency (FEMA) show the bulk of the nation’s annual losses from earthquakes are expected to occur in California, Oregon and Washington – with most of that loss in California.
Although quake-prone California collects more earthquake premiums than any other state, the insurance costs significantly more than in Oregon and only about 12 percent of Californians are covered for earthquakes. The state created the California Earthquake Authority to ensure homeowners could buy earthquake insurance after the 6.7-magnitude Northridge Earthquake of 1994, the costliest quake in U.S. history.
The majority of economic loss is along the West Coast but earthquake risk is nationwide. About 35 percent of Missouri residents, who are part of the New Madrid seismic zone in the central Mississippi Valley, are insured for earthquakes…”
Insurancenewsnet also noted that the Haitian earthquake disaster could act as a wakeup call in, Recent Temblors Put Focus on Need for Quake Insurance:
“A 6.5 magnitude earthquake that recently struck the shore of Northern California didn’t even come close to the devastation of the quake that destroyed much of Haiti on Jan. 12. But Pete Moraga, spokesman for the Insurance Information Network of California, said temblors like the one that shook the Sunshine State put focus on the need for insurance.
“This was a sizable wake-up call,” Moraga said. He said the combination of where the earthquake’s epicenter was and building codes in the state reduced the damage but the next time could be a different story.”
The Insurance Information Network of California highlights the current state of affairs regarding earthquake insurance in California:
“Only 12 percent of California homeowners currently own earthquake insurance policies, potentially leaving millions of Californians financially unprotected in the event of a catastrophic quake.
“Historically, the longer California goes between major quakes, the more homeowners drop their earthquake coverage,” said Candysse Miller, executive director of the Insurance Information Network of California. “Without a financial recovery plan, homeowners should expect to be hit by financial aftershocks in the event of a major quake.”
Though Tuesday’s Chino Hills temblor caused only minor damage, it was the first sizable quake to strike a Southern California metropolitan area since the 1994 Northridge earthquake. At the time of the Northridge quake, nearly 30 percent of California homeowners purchased earthquake coverage.
IINC research has indicated that Californians may errantly believe that their homeowner and renters’ insurance cover earthquake damage. Past surveys by IINC revealed that far more Californians believed they had insurance for earthquake and flood damages than actually purchased the policies. Like flood insurance, however, earthquake coverage is purchased separately from standard homeowner and renters’ policies.
In 2006, an IINC poll found that 31 percent of Californians believed they had earthquake insurance, when sales trends indicated that fewer than 13 percent of California homeowners had earthquake coverage. Today, roughly 88 percent of California homeowners reject earthquake coverage.
“Financial preparedness is a key and often overlooked part of disaster readiness,” Miller said. “It may sound like a chore, but understanding your insurance coverage is a critical step in protecting your home and assets.”
Fear of loss and the current reminder from Haiti’s devastation is something insurance agents and brokers should be emphasizing to their customers. It is human nature to not dwell upon unpleasant possibilities of financial disaster caused by events out of our control. The purpose of insurance is to provide the peace of mind that, in the unlikely event of a catastrophe, there is a softening of the impact. Insurance helps and is most effective to individuals and society at large when we recognize those perils and widely insure against them. California, in particular, is awaiting this crisis because its population is not widely insuring against earthquake destruction. Agents and insurers need to get this message out in the media before California truly becomes a national bailout state.
Many adjusters have found purposeful work as catastrophe adjusters. I have suggested to many experienced adjusters that there is a great deal of gratifying work when they help adjust claims in an area of widespread devastation. I have heard countless stories from policyholders and adjusters about how an adjuster can soften the emotional blow to policyholders. While I am often looked at by many as only a critic of the insurance claims industry, most dedicated adjusters work long and hard to help those in need following widespread natural disaster. Most do it for more than just the money, and I strongly encourage those in the insurance claims industry to try CAT adjusting.
Public adjusters can also help. Following Hurricane Andrew in 1992 and then the Northridge Earthquake in 1994, I noted how many public adjusters travelled cross country to ply their trade. This trend has continued. I have also encouraged public adjusters to obtain licenses in various states, anticipating a demand for their services. Public insurance adjusters should consider the need for their work in the western states following an earthquake and prepare for that today. Business arrangements with local public adjusting firms can be made in advance.
Unlike Haiti, we are one of the wealthiest countries and people. In an affluent society such as ours, insurance becomes even more important because we have so much more to lose. Our financial affairs are interconnected. In modern American society, business collapse and personal financial loss have ripples far beyond the local community and its physical damage. Insurance is a wonderful man-made financial product that provides society in general with a mechanism to mitigate these inevitable catastrophes, so that those ripples do not become waves causing more significant loss, including that of our fortunate affluence.
Our society, unfortunately, seems ever more inclined to defer personal expenditure upon available insurance for one reason or another. Instead, possibly as a result of seeing so many other individuals, small businesses, and, now, even our largest financial institutions being given money from the government following various widespread physical or man-made financial disasters, many are irresponsibly refusing to take responsibility for themselves. When I served on the Citizens Mission Review Task Force, I heard many people comment that Florida would simply rely upon the national government in the event the “big one” struck Florida. I noted in Actuaries Are Underwriters With No Personality that:
“After the session ended, I tried to explain what I think we did as a group to three newspapers and another television station. I recognize that the issues are very important, but I have never dreamed that issues of insurance rates, which will take effect a year from now, could ever be this newsworthy. The problem is that we are just making suggestions for legislation. The big fights will take place later this spring. We did not directly address the biggest issue.
The biggest question which needs to be answered by all the intelligent, nerdy actuaries and financial types is:
If we get into a really big hurricane season or another Hurricane Andrew, is there any way to avoid Florida’s bankruptcy and inability to pay claims?
From what I have heard about the current scheme so far, the answer is “no.” Nobody wants to hear this. It is almost impossible to contemplate that the Catastrophe Fund will not operate to save us. But in some of the limited discussions we had on this topic, my impression is that no actuary is guaranteeing anything if a big disaster hits. All bets are off at that point. We will be charting new financial waters similar to what we are doing now with our economy. A few mentioned that Florida will have to look for a bailout. Seems like that line is pretty long right now.”
Eventually, there is no free lunch. Debts will have to be paid. Actuaries can estimate debts of future physical destruction. We should encourage private expenditures and savings for these occurrences through private insurance as much as possible. Every law and action that we take which fails to do so, encourages this growing notion that others will be there to finance individual catastrophe losses as a bailout and discourage saving and actions mitigating against the same. There is not enough discussion of this unfortunate trend in the United States. The trend is reflected by many who have much more financially at stake than the poor victims in Haiti could ever dream of losing, intentionally not insuring against exposures.