Quake Bill Means Big Debt After the Big One

One of the consequences of the recent Japanese earthquake is that legislation that might not be a good idea seems significantly more appealing. This seems to be the case with new legislation being proposed by Senators Barbara Boxer and Dianne Feinstein to subsidize the purchase of earthquake insurance in California.

California is a very earthquake-prone state and all its residents are aware of this. Yet currently only 12% of Californians have earthquake insurance. Benjamin Barendrick, a Farmers Insurance Agent based in San Francisco told FrumForum that in the current economy, most Californians simply can’t afford to purchase earthquake insurance:

The economy is so bad it is hard to qualify for a home and have money to pay for insurance. If you have a home that’s valued at a million dollars, you are talking about two million in earthquake insurance with a 15 percent deductible.

Boxer and Feinstein’s solution is a bill that would lower the cost of insurance in California by letting the California Earthquake Authority (CEA) (a private-public partnership for earthquake insurance in the state) receive federal loan guarantees.

The bill’s supporters claim it will lower costs and make it easier to purchase insurance. This is indeed an accurate assessment of what will happen when you subsidize the cost of insurance. Critics however contend that insurance will be unsustainable once an earthquake actually hits the state.

Brad Kading, the head of the Association of Bermuda Insurers and Reinsurers told FrumForum that the bill would distort the market, creating liabilities that the CEA could not hope to be able to pay back in the event of an earthquake.

According to Kading, limited resources should be spent on mitigation efforts: “limited government resources should be used to prevent damage in the first place. With building codes for example, or incentives to reduce the risk of loss.” Kading cited a 1990s era pilot project between the City of Oakland and FEMA where government funds were used to help retrofit homes to be more prepared for earthquakes as a positive example of this. Investments such as this makes homes more protected against earthquakes which helps bring down costs of insurance over the long run.

Large federal guarantees of the sort being proposed by Boxer and Feinstein are, unfortunately, not unprecedented. A similar guarantee by the federal government for flood insurance has left that program $18 billion in debt it is hard to see how a similar fate could not also come to the CEA if it were to receive a similar guarantee. The inevitable choices that California will face if this bill passes and an earthquake hits will either be to raise yet more taxes in an already high-tax state, or to receive a federal bailout.

Follow Noah on Twitter: @noahkgreen

Tweet