A major earthquake in the United States could cause billions of dollars of damage. But as Simon Penney, Head of Underwriting Analytics at 色多多视频Reinsurance, explains, many of the regions most exposed to an earthquake have low insurance take-up, leaving hundreds of thousands of people at risk of losing their homes should a catastrophic earthquake occur.
When we think about the protection gap, it is typically emerging economies that spring to mind. But there is also a troubling, and potentially widening, protection gap in one of the wealthiest economies in the world – the United States.
Earthquakes are difficult to predict and do not happen with the frequency of other well-known natural catastrophe risks, like windstorm or flood. But when they do occur, they can have devastating effects, as the tragic events in Turkey, Syria and Morocco, among others, demonstrated last year. And the risk is ever present.
Although it is impossible to accurately predict when quakes will happen, scientists can use data from existing fault lines and past events to gain insights about potential future earthquakes, while studies of geology can give information about how the ground would shake in the event of seismic activity.
Recent studies show that large swaths of the United States are exposed to earthquake risk. The United States Geographical Survey (USGS) last month published a comprehensive National Seismic Hazard Model Map for all 50 of the US states. The model map revealed that some 75% of the United States could experience a damaging quake or severe ground shaking.
More than 50 scientists from the USGS and partner organisations used historical data, as well as the latest data collection technology and tools, to assess the likelihood of future earthquakes and how intense shaking might be. This use of new tools and technology identified about 500 previously unrecorded faults.
The hazard model map also illustrates the possibility of more damaging earthquakes along the central and northeastern Atlantic corridor, including in the cities of Washington, D.C., Philadelphia and New York City, and the Boston area. And observations drawn from the recent volcanic eruptions and seismic activity in Hawaii showed that it is at greater risk from ground shaking than was previously understood.
The research showed that 37 of the 50 states have experienced earthquakes of at least magnitude 5 in the last 200 years.
But despite this exposure to earthquake risk, earthquake insurance is not widely purchased in the United States, even in those areas known to be most vulnerable. Earthquake insurance is typically excluded from homeowners’ insurance policies in most states and is not a common prerequisite for mortgage financing.
Although standalone earthquake insurance is available, most residents do not purchase coverage. According to the Federal Emergency Management Agency (FEMA), only about 10% of residents in some counties of California have earthquake insurance, despite the state having experienced 90% of the country’s earthquakes, while in the second most seismically active state – Washington – only just over 11% of residents have coverage.
The size of the gap
The West Coast of the United States, notably California, is highly vulnerable to earthquakes because of the location of the San Andreas fault. The catastrophic 1906 San Francisco earthquake, estimated to be magnitude 7.9, destroyed about 80% of the city and left hundreds of thousands homeless. More than 3,000 people were killed, the largest death toll from a natural catastrophe in US history. Experts estimate that property losses from the quake would have reached about $9.8 billion in today’s terms, with about $5.7 billion of those losses insured. Although it could be argued that population growth in the region over the past century would mean the true financial damages, if the event were to occur today, would be many multiples of this figure. Relative to economic output, the 1906 earthquake was the most expensive natural catastrophe in US history.
In 1994, the Northridge earthquake struck Los Angeles, along a previously unknown fault, causing about $20 billion in property damage. The 6.7 magnitude earthquake left 57 people dead, about 8,700 injured, and about 125,000 people temporarily homeless.
Although residents of California are typically well-versed in earthquake drills, a relatively small proportion have insurance that would cover them in the event of their property being damaged.
Since the 1980s, California state law has mandated that insurers offering residential property insurance also offer earthquake insurance. In the wake of the Northridge earthquake in 1995, however, about 90% of insurers either restricted the homeowners coverage they underwrote in California or withdrew from the market altogether.
In response, California set up the California Earthquake Authority (CEA), a nonprofit organisation, in which residential property insurers can participate – or they can continue to offer their own earthquake policies alongside homeowners coverage.
The CEA today provides about two-thirds of the earthquake insurance in the state. But many hundreds of thousands of properties are still without coverage.
If an earthquake were to take place in California, it is clear that there is a potentially huge gap between property damage losses and the proportion of those that would be covered by insurance. And the same is true across the country.
Not only are hundreds of thousands of people taking on an uninsured risk to their homes, banks and lenders that provide mortgage and real-estate financing would also face considerable balance sheet exposure if a serious earthquake were to hit.
There is work to be done, therefore, in encouraging uptake of earthquake insurance, which typically is not onerously expensive, in the United States. Communication around the scale of the protection gap and the potential risk is, therefore, key.
Alternative methods of insurance are available, too. Parametric coverages, which pay out based upon a predetermined trigger, for example the magnitude of an earthquake without the need for policyholders to demonstrate a loss, could be a useful tool in helping to close the sizeable gap between earthquake exposure and insurance coverage.
No one knows when the next earthquake will hit the United States. And memories are perhaps short, even after such devastating events as the Northridge quake. But when a large earthquake does occur, the potential damages, and subsequent economic turbulence, could be huge. We urge property owners to prepare for this risk, to take into account its potential impact, and consider the possibility that earthquake coverage could be a valuable tool in helping to build resilience to what is a potentially catastrophic threat.
