The insurance industry will press Congress next year to create a semipublic agency to finance national earthquake insurance, as it already does for flood insurance, claiming that a major quake would otherwise be uninsurable, the head of a committee drafting the legislation said Wednesday.
"A major quake is an uninsurable event," said John B. Crosby, general counsel of the National Assn. of Independent Insurers, a trade group representing 530 property-casualty insurance companies. "We just can't insure it all."
Crosby is a member of an industry-supported Earthquake Project developing legislation that would require all homeowners with mortgages backed by the federal government to purchase earthquake insurance. The government would pay earthquake losses through premiums sold by private insurers but deposited in a special fund.
The industry also wants the proposed agency to finance catastrophic reinsurance that private insurers could buy to spread their risk for especially large amounts of damages. Under this scheme, the government's share of the damages would be paid out of a pool of funds amassed from premiums.
120 Million at Risk
"Although most of us think of San Francisco and Los Angeles as the most critically exposed--not an entirely inaccurate assumption--we rarely think of Charleston, Little Rock and Memphis as having similar exposures, but they do," Franklin W. Nutter, president of the Alliance of American Insurers, wrote last summer in Business Insurance, a trade journal.
Missouri's New Madrid fault, for example, is overdue for a major shaking. The last quake erupted in 1811, Nutter claimed. That temblor caused damage in nine surrounding states and sent shock waves that reportedly awakened Thomas Jefferson in Monticello, Va.
Seismic studies indicate that 120 million people in 39 states face a serious risk from earthquakes, he added.
In addition, were the 1906 earthquake that destroyed much of San Francisco 81 years ago repeated today in California--or, say, St. Louis--damages could reach $50 billion, Crosby said. But only about $5 billion of that loss would be covered by private insurance. Besides property damage, there would be additional insurance losses covered by workers' compensation, business-interruption and health insurance.
'Not Just a California Problem'
Only about 20% of all California homeowners presently have earthquake insurance, and the percentage falls sharply outside the state. By spreading the risk more broadly, he said, the cost would fall significantly. California homeowners now pay about $250 a year to add earthquake insurance on a $100,000 house with the owner liable for the first $10,000 of damages--10% of the policy's face amount.
Major deterrents to purchasing the coverage are its cost--not to mention consumer fear that, were damages widespread to exceed the 10% deductible, the insurance industry would be unable to pay all claims.
"It's a national problem, not just a California problem," Crosby insisted in an interview before meeting with the association's member companies in Beverly Hills to discuss insurance issues--and last week's quake centered in Whittier.