Chapter 7 : Earthquake insurance as a hazard reduction strategy : The case of the homeowner

ABSTRACT

A case made in this chapterfor requiring homeowners in earthquake prone areas throughout the country to purchase insurance and adopt cost-effective Loss Reduction Measures (LRMs). Substantial empirical data show that many homeowners do not voluntarily purchase insurance because they perceive the probability of the event to be so low that "it cannot happen to me". One reason few individuals take steps to mitigate potential losses is that they have short-time horizons and are not convinced that the expected long-run benefits from the LRMs justify the upfront expenses. The available data indicates that many insurance firms could suffer substantial losses from a major earthquake. Many insurers claims will be from indirect losses such as fire and workers compensation which are covered by non-earthquake policies. A Federal reinsurance program, similar to the one proposed in the Earthquake Hazards Reduction Amendments Act now before Congress, could be an appropriate solution. In return insurers should be able to reduce premiums from what they currently charge and provide rate-based incentives to homeowners to encourage them to adopt cost-effective LRMs.(AU)