Earthquake Insurance The Best Deal?

Earthquake insurance is a form of disaster insurance, and with the current swarm of earthquakes in Mexico and California earthquake insurance is a topic much in the news.

Earthquakes have been around for a lot longer than earthquake insurance. As our society develops more and more sophisticated building and cities the cost of a earthquake increases exponentially.

Earthquake Insurance a Late Starter.

Insurance is a surprisingly ancient concept. The ancient Babylonians and Chinese both developed the concept of commercial insurance so that the loss of a ship didn't financially destroy the merchant. There are written records of insurance policies dating back to the second millennium BC.

In modern times insurance against the risk of fire was invented after the 1666 Great Fire of London which destroyed 13,200 buildings. Benjamin Franklin popularized the idea of fire insurance in the United States and introduced the concepts of refusing to insure some building (all wooden) which were too high a risk, and conversely, promoting techniques to reduce fire risk.

When the 1906 earthquake flattened San Francisco over 80% of the city was destroyed not by the earthquake itself, but by the subsequent fires which burned out of control for many days. Its even possible that owners of damaged properties actually burned their own properties down. That's because at the time most property was insured for fire but not for earthquakes. The insurance industry paid out $235 million (some $5.69 billion in today's dollars).

Earthquake Insurance A Risky Business

Many Californians are either under insured or uninsured. New Zealanders, who live in a country equally earthquake prone part of the Pacific are almost all covered by insurance - what's the difference.

In the New Zealand model every home is covered up to NZ$100,000 by a government-guaranteed fund. Every house that has home insurance, which is maybe 80% of the stock as insurance is a requirement if the home is mortgaged, is covered up to the agreed value or replacement cost of that policy. In contrast earthquake insurance in California is not compulsory - insurance companies do not have to participate in the California Earthquake Authority scheme which provides earthquake insurance - and that fund is not government guaranteed or funded.

A different approach to earthquake insurance occurs in Italy. Most people are uninsured and the government pays for reconstruction after the event as required. In effect the country self-insures and pays for damage as and when required rather than paying for insurance premiums, including the insurance companys' profits.

The key to a good insurance scheme is one that provides good coverage for almost all property owners, at an affordable price, but without the risk of bankrupting the insurer. The risk needs to be spread over as large a base of policies as possible to reduce that risk. This should be a lot easier for a large country such as the US than a small one such as New Zealand.

Or maybe the best approach is self-insurance either by the individual or the country?