California faces severe earthquake risk, yet consumers routinely choose not to purchase insurance products to cover this risk. Low earthquake insurance take-up rates create a scenario in which a major event could result in significant personal, societal, governmental and financial disruptions. The problem is real and serious, although understanding its precise magnitude will require more research.
More than one-third of California’s earthquake risk is held by the California Earthquake Authority. The CEA is a publicly managed but privately funded state instrumentality founded to stabilize the state’s homeowners insurance market in the midst of an availability crisis following 1994’s Northridge quake. The crisis resulted directly from California law insisting that homeowners insurers must offer earthquake insurance, a law that still stands. However, the mission of the CEA has changed over the past 20 years. It is now the CEA’s goal to increase the state’s earthquake insurance take-up rate.
Increasing the take-up rate is an important objective. Risk that is not maintained in private hands will become a public burden. But to achieve higher take-up rates with a repurposed CEA, the organization’s structure needs to evolve. Disincentives to marketing earthquake insurance need to be removed and replaced with sales incentives. Mitigation incentives need to be linked with policy sales in a financially attractive way. Finally, tax incentives, coupled with regulatory updates, are needed to address a current perverse incentive to self-insure.
In addition to the affirmative steps California must take to increase the earthquake insurance take-up rate, it also must avoid potential missteps. Increasing the take-up rate by relying on post-event funding mechanisms will lead to actuarially unsound pricing practices that will burden all Californians, regardless of their relationship to earthquake risk. To grow the number of insureds prudentially, California should instead look to introduce an insurance requirement for mortgages that are backed by taxpayers. Such a system would preserve individual decisional autonomy while simultaneously reducing the seismic risk currently shouldered by taxpayers. Fortunately for California, should the will exist to avail itself of the opportunity, there is substantial risk-transfer capacity available to facilitate a mortgage requirement of that type.