Yesterdays M5.9 earthquake which struck in the U.S. state of Virginia and was felt across much of the eastern cities such as Washington and even as far away as New York has given interested parties a chance to raise the issue of the cost of earthquake insurance. Across the U.S. uptake of earthquake insurance by homeowners is low, even in California where 80% of residents are exposed to possible earthquakes just 10% actually have quake coverage.
The California Earthquake Authority (CEA) has taken the opportunity presented by the Virginia quake to raise the issue of the Earthquake Insurance Affordability Act (EIAA) which could be addressed in the U.S. Congress soon. The legislation would allow for cheaper insurance to be sold to householders as the act would allow any public, non-profit earthquake insurer to issue private debt in order to maintain liquidity after an event strikes. The CEA have published a factsheet on the EIAA here.
Of course the CEA has just completed a groundbreaking catastrophe bond transaction through their Embarcadero Re Ltd. SPV which provides them with an additional $150m of reinsurance coverage from the capital markets. At the time that it was completed the CEA stressed that the cat bond facility had been set up to allow them to revisit the capital markets for increased protection on a regular basis.
The CEA press release, published yesterday, says about the EIAA; “Combined with reinsurance and innovations in risk-transfer, EIAA would cut the cost of earthquake insurance making it more affordable and accessible to homeowners.”
Any mechanism which enables earthquake insurance coverage to be made available more cheaply can only be a good thing, particularly if it reduces the reliance on taxpayers in the event of a major disaster. We would suggest that increasing the volume of earthquake exposed catastrophe bond issuances would be a similarly good hedge to allow earthquake insurance to be made more cheaply available to residents of earthquake exposed U.S. States and to keep the sources of reinsurance well diversified.
Glenn Pomeroy, CEO of the California Earthquake Authority said; “It’s a fact that all federal taxpayers are seriously exposed to the massive costs of earthquake damage. Because too few households can afford earthquake coverage, we know that when individuals can’t afford to rebuild, the federal government is asked to help. Making earthquake insurance more affordable helps families rebuild and their communities recover, but it also reduces federal taxpayers’ financial risk. Congress needs to take action on the Earthquake Insurance Affordability Act when it returns from its August recess.”
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