Summary: The July 4 earthquakes that hit South Central California are a fresh reminder that California's population is the most susceptible in the country to major earthquakes. So why is it, that earthquake insurance is no longer required as a condition for California mortgages? Especially, when wind insurance is required throughout the state of Florida and elsewhere to protect against hurricane damage? While less frequent, earthquakes are unique in that the risk is constant and the potential damage can easily exceed those of hurricanes, wildfires, and flooding combined. Is it time to readjust our public policies - and our insurance policies - to adequately cover all our 21st century risks? Host Lisa Miller, a former deputy insurance commissioner asks John Rollins, Consulting Actuary for Milliman and Jim Wilkinson, Jr., Executive Director of the Central United States Earthquake Consortium (CUSEC). Show Notes Losses from the early July earthquakes in and around Ridgecrest, California are estimated to reach $200 million of which insurance companies will likely cover only about a fifth, according to Karen Clark & Company. Less than 20% of property owners affected by the magnitude 7.1 quake and the 6.4 magnitude foreshock had earthquake insurance. The event has rekindled discussion on earthquakes in California. If a similar quake had occurred in a more populated area, the costs could have been much worse. California homeowners policies don’t cover earthquake damage. According to global consulting and actuarial firm Milliman, the lack of protection for 90% of the state’s 14 million dwellings poses a risk to the largest assets of many state residents: their homes. So why is earthquake insurance no longer required as a condition for California mortgages? GSE’s (Government-Sponsored Enterprises, a type of financial services corporation such as FannieMae and Freddie Mac) servicing guidelines don’t require it, so private lenders who originate and sell mortgages to the GSE’s don’t either. Contrast this to windstorm insurance, which is required everywhere as a condition for a mortgage, as dictated by the same GSEs. John Rollins, Consulting Actuary for Milliman, explained that while different regions in the U.S. are predominantly impacted by a single peril, such as California with earthquakes and Florida with hurricanes, Milliman’s research indicates that all of the catastrophic perils from earthquakes, wildfires, floods, and hurricanes, actually contribute significantly a measureable amount to the total amount of what an actuarially-sound homeowners premium should be for the true risk of these disasters underlying each policy across the U.S. “Each one of those types of disasters contributes potentially hundreds of dollars to the quote -‘fair’ – or right insurance premium as actuaries would define it,” said Rollins. “So that runs up against a policy question, which is, if you have significant, roughly equal risk from hurricanes, floods, wildfires, and earthquakes across the country, why aren’t the guidelines for determining eligibility of mortgages for Fannie Mae and Freddie Mac… and their concomitant insurance servicing requirements exactly the same across the country? We don’t have all the answers as to why that it, but we do know that a pure clinical look at the numbers would indicate that there’s really no reason to favor one peril over the other,” Rollins said. The Central United States Earthquake Consortium (CUSEC) is comprised of the eight states that would be most impacted by quakes along the New Madrid earthquake fault line, which runs along the Mississippi River, in partnership with FEMA. CUSEC examines the earthquake threat and ways to encourage mitigation and reduce losses. Yet, earthquake insurance isn’t popu(continued)
