Policy Documents

Should Society Deal with the Earthquake Problem?

Howard Kunreuther, Neil Doherty, and Anne Kleffner –
April 1, 1992

Everyone in California knows that it is just a matter of time before a part of the state is hit by a severe earthquake. The Loma Prieta earthquake, which interrupted the World Series of 1989 and caused approximately $10 billion in property losses in the San Francisco Bay area, was a grim reminder of the damage that such disasters can cause. An earthquake similar to the one that rocked San Francisco in 1906 is predicted to cause considerably more damage than the 1989 quake.

There are two complementary ways that residents and businesses in those hazard-prone areas can reduce the effect of a catastrophic earthquake on their property. They can adopt mitigation measures, such as anchoring their house to the foundation, which will reduce property losses in the event of a severe quake. In addition, they can reduce their recovery costs from a disaster by purchasing private insurance. To date those measures are voluntary since the attitude that we have taken in society is that people should recognize the dangers facing them and then adopt cost-effective protective measures.

Relatively few residents have taken loss mitigation measures, even after severe earthquakes. Many of those actions are cost-effective in saving lives, reducing injuries, and lowering property damage from future earthquakes. Most residents in California are also uninsured against shaking damage even though everyone has been informed by his homeowners' insurance company that earthquake insurance is available. Although insurance companies are required to offer earthquake insurance to policyholders who have homeowners' coverage, agents are reluctant to promote it widely. With their existing portfolio, insurers are concerned that a catastrophic quake will wreak financial havoc on their balance sheets and may lead to insolvency.