California law says that if an insurer sells homeowners insurance, it must also offer earthquake insurance. Insurance companies may be many things, but they are definitely not suicidal. So far, the Northridge quake has cost more than $11.4 billion versus a total of $3.4 billion in earthquake premiums collected by all companies over the past 25 years. The $8-billion difference comes off the top of insurers' net worth, resulting in roughly a $24-billion reduction in their ability to accept new business. A Kobe-size quake tomorrow would threaten much of the industry with bankruptcy.
Americans don't like paying insurance premiums. That's a known fact--one that has spawned an army of insurance activists. However, many of those activists fail to recognize that consumers like even less the idea of paying premiums to a company that can't pay claims.
Insurers are now reluctant to assume even more risk by selling new policies. But homeowners, lenders and society in general, faced with the virtual certainty of future losses, clamor for greater protection. Until a more effective national solution is enacted, insurers are advocating that the law requiring the offer of earthquake coverage with every homeowners policy be changed because it forces companies to add new customers who choose to live on fault lines. As a result, the 25% of Californians who want earthquake insurance because they have a huge likelihood of loss consume much of the industry's capacity to accept other risks and are, thereby, restricting the ability of other homeowners to obtain home insurance.
Insurers and a coalition of many organizations outside the industry are supporting legislation in Congress to create a private insurance industry/federal government partnership to backstop the budget-crushing megadisasters this country will surely continue to face. The legislation is based on the simple realization that, given the magnitude of modern disasters and the value of property at risk, insurers alone don't and won't, in the current regulatory environment, have the financial ability to pay what must be paid.
Many insurers have applied to the state insurance commissioner for higher earthquake insurance rates that more accurately--they hope--reflect their probable future obligations to existing customers. Like any business, they need to cover their costs by collecting and setting aside at least as much as they expect to pay out.
For consumers, higher premiums mean hard choices. For insurers, it may mean fewer buyers. But insurance is vital to the financial well-being of millions of families depending on the industry's promises. And for consumers, an empty promise is worse than an expensive promise.
In spite of these amply documented facts, there still are those who label the industry's reaction to the heightened earthquake risk as "extortion," or call the earthquake-induced crisis a conspiracy.
Consumer advocates, commentators and skeptical policy-makers with this attitude should band together. For less money than it takes to open a Beverly Hills restaurant, they can form their own homeowners insurer and market all the earthquake coverage they want. Don't talk about it, do it. Beat the insurers at their own game.
Despite the clear need and the ease of start-up, there is no flood of new insurers. No consumer activists, commentators or governmental entities are rushing in to reap the "bloated profits" of California's homeowner/earthquake insurance market.
So, perhaps what we have isn't a conspiracy after all. Once the ultimate risks of the market are understood, it looks a lot more like simple, responsible financial realism.