Earthquake insurance

Earthquake insurance

Discussion
Ask a question about 'Earthquake insurance'
Start a new discussion about 'Earthquake insurance'
Answer questions from other users
Full Discussion Forum
 
Encyclopedia
Earthquake insurance is a form of property insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

 that pays the policyholder in the event of an earthquake
Earthquake
An earthquake is the result of a sudden release of energy in the Earth's crust that creates seismic waves. The seismicity, seismism or seismic activity of an area refers to the frequency, type and size of earthquakes experienced over a period of time...

 that causes damage to the property. Most ordinary homeowners insurance policies do not cover earthquake loss.

Most earthquake insurance policies feature a high deductible
Deductible
In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...

, which makes this type of insurance useful if the entire home is destroyed, but not useful if the home is merely damaged. Rates depend on location and the probability of an earthquake. Rates may be cheaper for homes made of wood, which withstand earthquakes better than homes made of brick.

In the past, earthquake loss was assessed using a collection of mass inventory data and was based mostly on experts' opinions. Today it is estimated using a Damage Ratio (DR), a ratio of the earthquake damage dollar amount to the total value
Total value
Total value may refer to:*Total Economic Value*Total philosophic value...

 of a building
Building
In architecture, construction, engineering, real estate development and technology the word building may refer to one of the following:...

. Another method is the use of HAZUS
HAZUS
Hazus is a geographic information system-based natural hazard loss estimation software package developed and by the Federal Emergency Management Agency ....

, a computerized procedure for loss estimation.

As with flood insurance
Flood insurance
Flood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplains and floodways that are susceptible to flooding.-Hidden floods:Nationwide,...

 or insurance on damage from a hurricane or other large-scale disasters, insurance companies must be careful when assigning this type of insurance, because an earthquake strong enough to destroy one home will probably destroy dozens of homes in the same area. If one company has written insurance policies on a large number of homes in a particular city, then a devastating earthquake will quickly drain all the company's resources. Insurance companies devote much study and effort toward risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...

 to avoid such cases.

California


Earthquake insurance has become a political issue in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

, whose residents purchase more earthquake insurance than residents of any other state in the U.S.  After the 1994 Northridge earthquake, nearly all insurance companies completely stopped writing homeowners' insurance policies altogether in the state, because under California law (the "mandatory offer law"), companies offering homeowners' insurance must also offer earthquake insurance. Eventually the legislature created a "mini policy" that could be sold by any insurer to comply with the mandatory offer law: only earthquake loss due to structural damage need be covered, with a 15% deductible. Claims on personal property losses and "loss of use" are limited. The legislature also created a quasi-public (privately funded, publicly managed) agency called the CEA California Earthquake Authority
California Earthquake Authority
Established in September 1996 by the California Legislature, the California Earthquake Authority is a privately funded, publicly managed organization that sells California earthquake insurance policies through participating insurance companies. It is based in Sacramento, California....

. Membership in the CEA by insurers is voluntary and member companies satisfy the mandatory offer law by selling the CEA mini policy. Premiums are paid to the insurer, and then pooled in the CEA to cover claims from homeowners with a CEA policy from member insurers. The state of California specifically states that it does not back up CEA earthquake insurance, in the event that claims from a major earthquake were to drain all CEA funds, nor will it cover claims from non-CEA insurers if they were to become insolvent due to earthquake losses. http://www.earthquakeauthority.com/CEAGeneralInformation.htm

Japan


The government of Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...

 created the "Japanese Earthquake Reinsurance" scheme in 1966, and the scheme has been revised several times since. Homeowners may buy earthquake insurance from an insurance company as an optional rider to a fire insurance policy. Insurers enrolled in the JER scheme who have to pay earthquake claims to homeowners share the risk among themselves and also the government, through the JER. The government pays a much larger proportion of the claims if a single earthquake causes aggregate damage of over about 1 trillion yen (about US $8.75 billion). The maximum payout in a single year to all JER insurance claim filers is 4.5 trillion yen (about US $39.4 billion); if claims exceed this amount, then the claims are pro-rated among all claimants.

New Zealand



New Zealand's Earthquake Commission (EQC) is a Government-owned Crown entity which provides primary natural disaster insurance to the owners of residential properties in New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...

. In addition to its insurance role, EQC also undertakes research and provides training and information on disaster recovery
Disaster recovery
Disaster recovery is the process, policies and procedures related to preparing for recovery or continuation of technology infrastructure critical to an organization after a natural or human-induced disaster. Disaster recovery is a subset of business continuity...

.

EQC was established in 1945 as the Earthquake and War Damage Commission, as part of the New Zealand Government, and was originally intended to provide coverage for earthquakes as well as war damage. Coverage was eventually extended from solely earthquake
Earthquake
An earthquake is the result of a sudden release of energy in the Earth's crust that creates seismic waves. The seismicity, seismism or seismic activity of an area refers to the frequency, type and size of earthquakes experienced over a period of time...

 and war damage to include other natural disasters such as natural landslip
Landslide
A landslide or landslip is a geological phenomenon which includes a wide range of ground movement, such as rockfalls, deep failure of slopes and shallow debris flows, which can occur in offshore, coastal and onshore environments...

s, volcanic eruption
Types of volcanic eruptions
During a volcanic eruption, lava, tephra , and various gases are expelled from a volcanic vent or fissure. Several types of volcanic eruptions have been distinguished by volcanologists. These are often named after famous volcanoes where that type of behavior has been observed...

s, hydrothermal activity
Hydrothermal vent
A hydrothermal vent is a fissure in a planet's surface from which geothermally heated water issues. Hydrothermal vents are commonly found near volcanically active places, areas where tectonic plates are moving apart, ocean basins, and hotspots. Hydrothermal vents exist because the earth is both...

, and tsunami
Tsunami
A tsunami is a series of water waves caused by the displacement of a large volume of a body of water, typically an ocean or a large lake...

s with coverage for war damage later being removed. For residential land, storm and flood damage is covered. Cover extends over fire damage caused by any of these natural disasters.

External links