Federal legislation would lower earthquake insurance costs in California

In the wake of the deadly earthquake and tsunami in Japan, two U.S. senators have introduced legislation aimed at substantially lowering the cost of earthquake insurance.

As it stands now, the bill would affect only the state-sponsored earthquake insurance program in California.

The proposed Earthquake Insurance Affordability Act — sponsored by U.S. Sens. Diane Feinstein and Barbara Boxer, both California Democrats — would allow state-sponsored earthquake insurance programs to access federal loan guarantees and better prepare financially for quakes. Currently, the only such program in the United States is the California Earthquake Authority.

Standard U.S. homeowner’s insurance policies do not cover earthquakes. Each year, about 5,000 earthquakes hit the United States, mainly in California and Alaska.

Only about 12 percent of Californians have insurance to cover earthquake damage to their homes and businesses.

Earthquake insurance premiums for a home in California can cost hundreds or thousands of dollars a year.

Deductibles for earthquake insurance generally range from 2 percent to 20 percent of a home’s replacement value, according to the Insurance Information Institute. This means that if it costs $400,000 to rebuild a home and the policy has a 2 percent deductible, the policyholder would be responsible for paying the first $8,000.

The loan guarantees would back debt issued by the California Earthquake Authority to cover earthquake losses. The full cost of the loan guarantees would be picked up the California program — at no cost to federal taxpayers.

Outside California, consumers buy quake policies directly from private companies.

In the first five years after the federal legislation took effect, nearly $500 million in reinsurance costs would be saved; that money would be passed along to consumers in the form of lower insurance rates. Reinsurance is purchased by one insurer from another insurer (a reinsurance company) as a way to manage financial risk.

Under this proposal, the California Earthquake Authority could cut premiums by 30 percent or deductibles by 50 percent, according to California Insurance Commissioner Dave Jones, who supports the Feinstein-Boxer bill. This could let at least 700,000 more California homeowners be covered by earthquake insurance.

Currently, only 12 percent of Californians carry earthquake insurance. That’s despite the fact that California is the most heavily populated state and one of the most quake-prone states. Geologists estimate there’s a 99.7 percent chance of a quake with at least a 6.7 magnitude striking California in the next 30 years.

“Preparing for earthquakes is critical, not just in California but in all the other seismic regions throughout the United States,” says Glenn Pomeroy, CEO of the California Earthquake Authority. “The simple truth is that our country is not adequately prepared for the destruction – and financial devastation – from the ‘Big One’ that strikes closer to home.”

Following major disasters, the federal government spends billions of dollars in response efforts. By enacting the Earthquake Insurance Affordability Act and increasing the number of Californians with earthquake insurance, the federal government’s disaster recovery expenses would decrease, supporters say.

“The tragedy and devastation of the recent earthquake in Japan was a real wake-up call,” Feinstein says.

“We cannot prevent an earthquake,” the senator says, “but we must do everything we can to prepare for one by ensuring homeowners have access to affordable earthquake insurance coverage. This legislation will allow homeowners to get back on their feet and recover more quickly in the event of a significant earthquake.”