SACRAMENTO, Calif. (Jan. 22, 2015) – Lawmakers need to find ways to expand the number of Californians who purchase earthquake insurance, given the extremely low take-up rate in the state and the inevitability of a catastrophic temblor, a new study by the R Street Institute concludes.
In his paper “Insuring a way out: Modernizing the California Earthquake Authority,” R Street Western Region Director Ian Adams outlines some of the very real challenges facing the state-run earthquake insurance instrumentality. While some have proposed the CEA should lower its rates by relying more heavily on post-event funding mechanisms, Adams warns that “risk that is not maintained in private hands will become a public burden.”

The CEA is a well-managed organization that is nonetheless in need of structural changes, Adams noted. “In order to modernize the current system, policymakers need to take a hard look at updating the CEA’s enabling legislation to reflect its current mission – expanding the number of Californians with earthquake coverage,” he said.

Meaningfully increasing the take-up rate can be achieved through a combination of deft legislative and regulatory changes. For instance, the CEA is beginning down the right path by seeking to diversify its product offerings to reduce premiums. Affordability is one of the most significant factors limiting the take-up rate of earthquake insurance. In some cases, adding an earthquake policy can nearly double the cost of basic homeowners insurance.

“Likewise, current investments in mitigation are undervalued because only minimal savings are realized before an event occurs,” Adams said. “Instead, customers should be given options and incentives in the form of long-term mitigation financing and premium discounts to encourage them to make their homes better prepared to face an earthquake and to mitigate damage when the event occurs.”

“As with mitigation efforts, tax incentives for homeowners to purchase coverage and tweaks to lending rules to ensure the risk of earthquake-related defaults is priced into mortgage loans will reward Californians for purchasing earthquake insurance up front, rather than going with the temptation to self-insure against these catastrophes,” said Adams.

The paper also notes insurers’ commitment to the CEA needs to be wholehearted and with an eye toward expanding earthquake coverage. Toward that end, the first step is to rethink CEA’s backward assessment structure.

“The current assessment structure discourages insurers from increase their number of earthquake policies in order to limit exposure,” Adams said. “Instead, insurers should face a separate assessment if their share of the CEA policies is markedly less than their share of the overall residential insurance market share.”

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