EXECUTIVE SUMMARY from R Street
Residents of California face substantial exposure to the earthquake peril. The U.S. Geological Survey predicts that there is a 99.7 percent chance that a magnitude 6.7 earthquake (equal in strength to the 1994 Northridge quake) will strike in California in the next 30 years and that there is a 46 percent chance that a magnitude 7.5 earthquake (45 times stronger than M6.7) will strike in California in the next 30 years. The most damaging earthquakes in recent U.S. history have occurred in California. In response to these events, the state created the California Earthquake Authority (CEA), a (largely) privately financed, publicly run insurance mechanism to improve availability and affordability of insurance. Nonetheless, at present, less than 12 percent of homeowners have insurance that will respond to earthquakes.
A secure, forward-looking capital structure currently supports the CEA’s ability to pay claims. It relies on a combination of risk-pooling, standard capital, syndication via reinsurance markets, and assessment of participating insurers. These methods, as currently applied, protect Californians against the earthquake peril without shifting this burden from current California residents to future California residents and residents of other states.
In an effort to increase market penetration, Senators Boxer and Feinstein proposed S.637, the Earthquake Insurance Affordability Act. The salient feature of this bill is to replace a large portion of the private capital securing California homeowners against earthquake damage with a federal government debt guarantee.
To read this whitepaper, please follow this link: http://rstreet.org/wp-content/uploads/2012/08/R-Street-Policy-Study-No-3...