Letter to the Los Angeles Times
In its editorial urging greater federal preparedness for natural disasters (“Washington should prepare for disasters, not just react,” Jan. 4) the Times offers support for “the California Earthquake Authority’s proposal to use federal loan guarantees,” on grounds that the plan would reduce the cost of earthquake coverage and encourage more people to obtain policies.
We at the R Street Institute have analyzed the proposed legislation and found a best case scenario of an 8 percent decrease in the cost of CEA coverage and only a 3.5 percent increase in policyholders buying coverage. This would not represent a meaningful improvement in California’s earthquake preparedness. Instead, adopting the legislation primarily would shift the cost of California earthquake risk forward in time, with increased post-loss premiums offsetting any pre-loss discounts. There is no free lunch when it comes to catastrophes.
It’s no great mystery why relatively few California homeowners purchase earthquake insurance. Unlike fires, floods and windstorms, Fannie Mae and Freddie Mac do not require that coverage for conforming mortgage loans. Without that requirement to buy coverage, Californians have instead invested in hardening their homes through seismic mitigation and retrofitting. While encouraging more Californians to buy earthquake coverage is a worthy goal, we would urge that lawmakers be cautious about wholesale changes to the CEA, which has been a model for a well-run, solvent residual insurance market.
R Street Institute