WASHINGTON (Dec. 13, 2013) – Research from the R Street Institute suggests new legislation introduced by Sens. Dianne Feinstein and Barbara Boxer, both D-Calif., offers the wrong approach to increasing the proportion of homeowners who are insured for earthquake risks.

Under the senators’ Earthquake Insurance Affordability Act, the California Earthquake Authority and other “non-profit insurance programs” would be eligible for federal loan guarantees for bonds issued following a major catastrophe, displacing their reliance on private reinsurance.

But while the bill’s proponents project it would immediately reduce earthquake insurance premiums and increase take-up of the coverage by significant amounts, a 2012 paper from R Street Associate Fellow Lars Powell found only negligible effects on those fronts.

According to Powell, the best case first-year effects of the program would be to reduce premiums by 8 percent and increase take-up by 3.5 percent. Assuming the program suffers no losses in the first five years after it is instituted, the maximum cumulative premium savings would be 16.5 percent and the maximum increase in take up would be 7.9 percent. Only about 9 percent of Californians in seismic zones currently purchase earthquake insurance.

Moreover, a more recent paper by R Street Senior Fellow R.J. Lehmann suggests a much more direct means to increase take-up of earthquake insurance: make coverage a requirement for mortgage loans owned or secured by the government-sponsored entities Fannie Mae and Freddie Mac.

“Right now, the taxpayers of the United States are effectively serving as the world’s largest insurer of earthquake coverage, extending what amounts to a $100 billion annual subsidy to the GSEs for their earthquake risk,” Lehmann said.

“The answer to this problem is not to shift that risk into yet another government-backed loan-guarantee program,” he added. “It is to require that those with a federally backed mortgage get coverage for their earthquake risks, just as they already must for wind, fire, flood and other risks. That this isn’t already required is the result of a bizarre loophole, one we would encourage the senators to close.”

Featured Publications