PHOENIX — The insurance industry would be incapable of paying claims in a catastrophic earthquake, and the responsibility for insuring against quake damage ought to be shifted to the federal government, state insurance commissioners were told here Thursday.
John Crosby of the National Assn. of Independent Insurers, who heads an industry earthquake task force, expressed hope that by 1989, Congress would agree to set up a mandatory earthquake insurance program paid for by citizens throughout the country.
Under the proposal, to be formally introduced early next year, all homeowners and businessmen with federally insured mortgages would have an unspecified amount added to their mortgage payments to establish a fund out of which quake losses would be paid.
Crosby said in an interview that rates would be set regionally, with areas such as California, where quakes occur most frequently, paying the most and less quake-prone areas paying the least.
Regardless of the region, he said, the rates would be "substantially less" than quake coverage now costs, but he gave no figures. He also said no congressional sponsor has yet been obtained for the proposal.
In California, where 70% of all the earthquake insurance in the United States is currently sold, the state Insurance Department estimates that only 15% of homeowners and an even lower percentage of businessmen have such insurance.
Although rates vary, a homeowner often pays about $250 a year on a $100,000 house to add earthquake coverage to his regular homeowner's policy. There is often a large deductible, perhaps $10,000 on the $100,000 house.
Crosby acknowledged that the proposal--developed by the task force of three industry trade associations, as well as State Farm and American International representatives--faces an uphill fight.
For one thing, many people in earthquake-prone areas have come to expect a government bail-out in quake situations, particularly for those who have no insurance.
In the recent Whittier earthquake, for example, government grants and low-interest loans to quake victims already exceed $35 million and continue to grow.
By contrast, the state Insurance Department estimates that insurance companies are paying out between $25 million and $30 million in total claims.
Grants and Loans
The basis of the industry's argument, as advanced here Thursday in a videotape presentation, is that while the present system of paying the losses incurred in moderately severe quakes--through a combination of private insurance and government grants and loans--has been working satisfactorily, it would be totally insufficient in a catastrophic quake.
The video estimates that if an 8 magnitude earthquake struck San Francisco, the total claims on insurance companies would exceed $50 billion. It says this would be beyond the capacity of the industry to pay and would send destructive ripples through the entire U.S. financial system.
The industry presentation presumes that claims from actual shaking damage in such a quake would only amount to $5 or $6 billion. However, the presentation presumes that subsequent damage from fires and interruption of business, for instance, would lead to massive claims under other policy clauses, and that these would have to be paid even if the insureds had no earthquake coverage.
Estimates provided The Times this week by another industry source, the Insurance Information Institute, foresaw a smaller but still substantial amount of claims on private insurance.
The estimate from the institute said an 8.25 quake, along with foreseeable fires, would produce $14 billion in claims in the Los Angeles area and $10.7 billion in the San Francisco area. But if 20-m.p.h. winds happen to be blowing, fanning fires caused by the quake, the claims would rise to $22 billion in Los Angeles and $18.7 billion in San Francisco, it added.
Crosby acknowledged that national support is required if a federal earthquake insurance system is to be adopted.
He laid considerable emphasis in his presentation on the fact that historically, California is not the only state where major quakes have occurred. He named the 1811 quakes in New Madrid, Mo.; the 1886 quake in Charleston, S.C., and the 1964 quake in Anchorage, Alaska, as other examples of highly destructive temblors and said that virtually all states are susceptible to earthquake damage.
Besides, he argued, the bad economic effects would not be confined to the quake area if the magnitude was large enough. The need for massive outside aid would ultimately be an economic drain nationwide, and breaks in pipelines, power lines and railroad service could also spread secondary losses over a wide area of the country, he said.
The state insurance commissioners panel that heard the presentation had little comment on it.
A federal official who was present, James Rose, executive assistant to the federal insurance administrator, said he believed that it would be better if such insurance responsibilities were borne by the individual states, not the federal government.