When it comes to California earthquake insurance, affordability is in the eye of the beholder. Californians are not convinced that earthquake risk is sufficient to warrant the purchase of products that are currently available, made clear by just a 10 percent take-up rate, despite a law forcing insurers to offer the product.

Why are 90 percent of the people not buying an essential product? The argument in favor of securing earthquake insurance has an individual component and a societal component.

From an individual perspective, privately secured capital to rebuild is fast to respond after a quake, since it is subject to contract law and not political will. For example, in Chile, a nation far poorer than the United States, the most recent major earthquake registered 8.8 magnitude and destroyed roughly 20 percent of GDP. Nonetheless, recovery began almost immediately, because 96 percent of homes with a mortgage were covered by private earthquake insurance.

From a societal perspective, relying on government aid creates an untenable situation in which, for every $1 spent on aid, individuals in high-risk areas forego spending $6 on private insurance. As time goes on and this cycle recurs, greater and greater amounts of government aid are needed.

Since earthquake risk is not abating, and since federal largess is not a guarantee, California’s policymakers need to consider ways to improve the California Earthquake Authority’s policy offerings. To the CEA’s credit, it already has taken the first step of offering lower-deductible policies. But more must be done.

The answer might be to broaden the pool of risk by bringing horizontal uniformity to the home mortgage process. Currently, lenders require homeowners to purchase multi-peril homeowners’ coverage to secure virtually any type of mortgage. Lenders do this to protect their investment, to forestall default in the event of a major loss and because such coverage is required by the government-sponsored entities Fannie Mae and Freddie Mac.

But lenders also should require insurance for specific catastrophic risks. In the case of flood risk, they already do. Homeowners situated in flood zones are required to carry flood insurance as a condition of their mortgage.

If a similar approach were taken with earthquake insurance the quality of earthquake policies would improve, since the risk pool would be larger and the institutions financing the risk could bundle California’s risk with other risks unlikely to be realized at the same time. On the consumer end, lower deductibles, lower premiums and discounts for mitigation efforts would all be made available.

Politically, an earthquake insurance requirement on mortgages will be a difficult lift. While conservatives may be perturbed at the prospect of another mandate, requiring private earthquake insurance coverage would prevent the government from having to act rashly in the wake of a catastrophe. Liberals may dislike more premiums being channeled into private hands, but this would allow the government can focus increasingly-scarce funds elsewhere.

On balance, while such a proposal may not appeal to everyone, the present system is a clearly heading for failure. Sometimes a nudge is in the best interest of society’s economic health.

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