New Zealand Earthquake Offers Stark Reminder of U.S. Vulnerability to Such Disasters, says I.I.I.

NEW YORK, February 23, 2011 —The 6.3 magnitude earthquake that struck New Zealand’s South Island near Christchurch this week is a stark reminder of the United States’ vulnerability to this type of natural disaster, according to the Insurance Information Institute (I.I.I.).

 

While New Zealand’s insured losses are too early to tell at this point, catastrophe modeling firm AIR Worldwide estimates that they could be between NZD $5 billion ($3.5 billion USD) and NZD $11.5 billion ($8 billion USD). The quake appears to have caused more extensive damage than when a 7.1 temblor struck New Zealand in September 2010 because the disaster occurred close to the surface and near the center of Christchurch. Insured loss estimates for the September 2010 quake are between $2.5 and $4.5 billion (USD), but will likely end up closer to the $4.5 and $5.5 billion (USD) range, according to Credit Suisse. The February 2011 earthquake is expected to have more insured commercial losses since it occurred closer to Christchurch, a more densely populated area, than the site of the September 2010 quake. Most of the cost of the New Zealand earthquake will be covered by reinsurance companies.

 

The potential cost of U.S. earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes. Much like New Zealand, where people have grown complacent in recent years about the threat of an earthquake despite government warnings, the vast majority of U.S homeowners living in seismic zones do not purchase earthquake insurance. In fact, less than 12 percent of California homeowners have earthquake coverage. 

Earthquakes and Insurance in the U.S.

Earthquakes are not covered under standard U.S. homeowners or business insurance policies. Coverage is usually available for earthquake damage in the form of a supplemental policy to homeowners or business insurance. Standard homeowners and business insurance policies may, however, cover losses from a fire following an earthquake, which would include additional living expenses and business interruption coverage. Cars and other vehicles are covered for earthquake damage under the optional comprehensive portion of an auto insurance policy.

Earthquake insurance policies often carry a deductible, generally in the form of a percentage rather than a dollar amount. Deductibles can range anywhere from 2 percent to 20 percent of the structure's replacement value. This means that if it costs $100,000 to rebuild a home and the policy had a 2 percent deductible, the policyholder would be responsible for paying the first $2,000.

 

In California, homeowners can also secure coverage from the California Earthquake Authority (CEA), a privately funded, publicly managed organization. The CEA offers homeowners dwelling coverage deductibles of either 10 or 15 percent. The CEA coverage limit is the insured value of the home as stated on the companion homeowners insurance policy. 

 

Earthquake insurance premium rates are determined differently by each insurance company and can vary widely depending on several factors, such as the location of the building and the construction materials.

U.S. Earthquake History

Since 1900, earthquakes have occurred in 39 U.S. states. Minor earthquakes, for instance, struck states such as Illinois and Nevada in 2008, but there has not been a major quake on the U.S. mainland since the 6.7 magnitude Northridge, California event in 1994.

 

Nonetheless, California remains the U.S. state most at risk of a major earthquake. According to a 2008 study compiled by experts from the U.S. Geological Survey, USC's Southern California Earthquake Center and the California Geological Survey, there is a 99 percent chance that at least one large earthquake will hit California within the next 30 years.

 

The Northridge earthquake and the 6.9 magnitude Loma Prieta quake that struck the Oakland-San Francisco, CA area during the 1989 World Series were the two most costly earthquakes in U.S. history, as defined by insured losses. The Northridge quake caused an estimated $15.3 billion in insured losses while the Oakland-San Francisco quake resulted in insured losses totaling nearly $1 billion at the time it occurred.

 

Yet, more than 17 years after the Northridge earthquake, less than one in eight California residents have their homes or businesses insured for property losses in the event of a quake, the Insurance Information Network of California (IINC) estimates.

Earthquakes and Insurance in New Zealand

The government of New Zealand insures residential properties against natural disasters through its Earthquake Commission (EQC), which was formed in 1945. In addition to damage from earthquakes, policies cover damage from volcanoes, tsunamis, floods, and landslides. Although EQC's rates are not actuarially set and do not reflect risks, the program's Natural Disaster Fund balances have grown significantly in the absence of a major disaster.

According to the EQC, New Zealand's Natural Disaster Fund has more than $4 billion (USD) in assets; primarily in the form of non-tradable government securities (the fund can invest up to 35 percent of its balances in global equities). The EQC has also purchased reinsurance of $1.5 billion (USD) in the private marketplace, improving its risk diversification. The EQC does not provide insurance for commercial properties. Insurance, however, is available through the reinsurance market.

If claims exceed the EQC's capacity to pay, New Zealand's treasury is likely to provide additional financial support. The largest number of claims the EQC has received to date stemmed from a 1987 earthquake, which cost about NZD $170 million (in current dollars). In most years, claims filed with the EQC have been under NZD $10 million. Only about half of the claims have been attributable to New Zealand earthquakes; most of the remainder has resulted from landslides.