Research & Commentary: Federal Earthquake Insurance Backstop

Published June 1, 2011

Legislation to create a new federal earthquake insurance backstop is currently being considered in Congress. The Earthquake Insurance Affordability Act, a bill from California Senators Dianne Feinstein (D-CA) and Barbara Boxer (D-CA), proposes limited backing from the federal government for the privately financed but publicly run California Earthquake Authority (CEA), California’s dominant seller of earthquake insurance. Although CEA isn’t specified in the measure by name, no other state has an entity that would qualify.

Proponents of the legislation say it would allow CEA to cut its premiums and thereby increase the number of people with quake insurance, and that doing so can be done at little or no cost to federal taxpayers. With more people buying earthquake insurance, they say, the federal government will achieve a reduction in disaster assistance dollars provided after an earthquake.

Opponents of the federal earthquake backstop say it would displace private companies and place much of the financial burden for a major earthquake on taxpayers because, rather than spreading risk around the world as is currently the case, a backstop would concentrate risk in the United States. In addition, opponents of the measure say it would undermine the CEA’s currently stable structure. Finally, they question that any legislation benefitting one state alone should become law.

The following articles examine the issue of a federal earthquake insurance backstop from multiple perspectives.

Tsunamis and Earthquakes: Is Federal Disaster Insurance in Our Future?
This Congressional Research Service Report for Congress by Rawle O. King examines the current disaster insurance system and whether federal disaster insurance is necessary.

Final Thoughts from the Seismic Risk Leadership Forum
This Out of the Storm News article by Eli Lehrer discusses the importance of damage mitigation efforts and the need for support for mitigation reform across the insurance system.

Calif. Senators Introduce National Earthquake Legislation
An Insurance Journal article discusses the legislation proposed by Senators Boxer and Feinstein and the reaction from the insurance industry.

Boxer-Feinstein Earthquake Proposal Is a Terrible Deal for California Taxpayers
This op-ed by Eli Lehrer discusses the Boxer-Feinstein earthquake proposal, arguing it is unlikely to work and could leave cash-strapped California with even greater fiscal problems in the aftermath of a major earthquake.

Challenges Facing the Insurance Industry in Managing Catastrophic Risks
This paper by Paul R. Kleindorfer and Howard C. Kunreuther suggests an approach to evaluating the role of insurance and other policy instruments for managing the catastrophic risk problem.

Government Insurance, Tax Policy, and the Affordability and Availability of Catastrophe Insurance
Scott E. Harrington and Greg Niehaus of the University of South Carolina examine the causes of capacity problems in catastrophe insurance, emphasizing the perverse effects of current federal tax law on the supply of coverage. The authors discuss several policy options to address these problems.

Should Society Deal with the Earthquake Problem?
This article from the Cato Institute’s Regulation magazine examines possible roles for government in responding to the potential damages from earthquakes.

Catastrophe Insurance, Dynamic Premium Strategies, and the Market for Capital
This paper by Thomas Russell of Santa Clara University and Dwight Jaffee of the University of California-Berkeley examines non-insurability of catastrophe risk, with a special focus on questions surrounding the insurability of earthquake risks in California.

Industry to Congress: Private Market is the Best Solution on Natural Disasters, But Some Say Federal Help Needed
This letter from insurance industry leaders to Congress argues the private insurance marketplace, not the federal government, is the best vehicle to address coastal insurance issues and natural disasters. However, some insurers say the federal government has a role in efforts to problems of insurance affordability and availability in coastal areas.

Federal Reserve Bank of St. Louis Review: Why Do Private Markets for Catastrophic Risks Fail?
This paper by Dwight M. Jaffee from the Federal Reserve Bank of St. Louis Review discusses the key role capital plays in insuring against catastrophic risks.