Policy Documents

Tsunamis and Earthquakes: Is Federal Disaster Insurance in Our Future?

Rawle O. King –
April 6, 2005

On December 26, 2004, an earthquake measuring 9.0 on the Richter Scale struck six miles below the surface of the Indian Ocean on the northern tip of the Indonesian island of Sumatra. The 2004 earthquake spawned a massive tsunami (and extensive flooding) that smashed the coastlines of 12 countries in South Asia and East Africa, resulting in over 175,000 fatalities, an additional 106,000 missing, and significant economic and non-economic damages. Insured losses are relatively low compared to the economic and non-economic costs. Few structures or facilities in the region were insured.

Although tsunamis pose some risk to coastal communities around the world, they occur infrequently in the United States. The communities at risk are along the U.S. West Coast, Alaska, and the Pacific Region (Hawaii, America Samoa, Guam, the Republic of Palau, the Federated States of Micronesia, and the Republic of Marshall Islands). In contrast, most Americans live in areas considered “seismically active” — although the degree of earthquake risk varies greatly — and the areas with the potential for the most seismic activities are the Pacific coast, the Mississippi valley around New Madrid in Missouri, Alaska, Utah, South Carolina, and the New England region centered around Boston.

Some insurance experts have suggested that a catastrophic earthquake could be a financial calamity for the U.S. property and casualty insurers. The Northridge Earthquake in California in 1994 was the last major earthquake in the United States, producing $15.3 billion in insured losses. The California Earthquake Authority (CEA) was created as a short-term solution to market dislocation, but today only 13% of California property owners have earthquake coverage, and the CEA is untested. In the aftermath of the 2004 Indonesian tsunami and America’s continued vulnerability to seismic hazards, Members of the 109th Congress might focus attention on the vulnerability of the U.S. coastlines to offshore earthquakes and tsunamis, and the potential effects of a major earthquake on both the homeowners’ insurance market and the overall U.S. economy. Congress has debated the vulnerability of America’s coastline to earthquake and tsunami hazard risks, leading to legislative action following the April 1992 California earthquake/tsunami and the 1964 earthquake/tsunami at Alaska’s Prince William Sound. Although a federal flood insurance program was eventually enacted in 1968 in response to the 1964 earthquake, it took Congress another decade to address the nation’s exposure to earthquake hazards with the enactment of the Earthquake Hazard Reduction Act of 1977. Congress did not create an explicit federal earthquake insurance program. The 1992 earthquake and tsunami led to the creation of the National Tsunami Hazard Mitigation Program. Some insurance and disaster policy experts suggest the time has come to implement a federal insurance or reinsurance program for earthquakes and other seismic risks. Conversely, other experts question the need for such a program.