Washington (September 18) – Earthquakes are among the most devastating and economically destructive natural disasters. Yet, unlike other common perils such as floods, fires and windstorms, the overwhelming majority of earthquake risk in the United States is completely uninsured. The primary cause of this disparity is that earthquake coverage is not required to secure the collateral of mortgages owned or guaranteed by government-sponsored enterprises (GSEs).

In a new policy paper, R Street senior fellow and director of finance, insurance and trade policy, R.J. Lehmann; and policy analyst, Daniel Semelsberger seek to quantify the size of that uninsured liability and propose a means to transfer these implicit taxpayer guarantees to the private sector.

The paper determines that Fannie Mae and Freddie Mac have $205 billion of uninsured earthquake risk on their books that, in the event of a major disaster, could leave taxpayers with nothing but a pile of rubble to secure those loans. The authors argue that Fannie and Freddie should look to transfer this risk to the private market and provide appropriate incentives for property owners to insure their homes and invest in risk mitigation.

The authors conclude, “[w]ith another Northridge-size quake a near certainty over the next 30 years, and with the potential for losses that could top $300 billion, the time has come to take a hard look at all of the options. Taxpayers can no longer be asked to bear the risk that hundreds of billions of dollars could come crashing to the ground in the blink of an eye.”



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