The earthquake that slammed through the San Francisco Bay area
in October 1989 killed 62 people and destroyed $5 billion worth of
The next time the earth's giant tectonic plates slip a few
yards, both people and property may be at far greater risk.
By government estimates, a quake hitting the wrong place at the
wrong time of day could kill up to 95,000 and leave a $100 billion
Los Angeles and San Francisco are prime targets, of course. But
the peril is hardly confined to California: the Federal Emergency
Management Agency believes that Seattle, Salt Lake City, Memphis and
Charleston, S.C., are also at ``major'' risk.
If the Big One hits - make that ``when'' it hits - who will pay?
Even in California, relatively few property owners are covered
by earthquake insurance.
But Robert E. Litan, an economist at the Brookings Institution,
estimates that damage from quake-related fires and injuries could
still result in up to $50 billion in insurance claims. Honoring
these claims, he argues, could severely deplete insurers' reserves,
driving some into bankruptcy and turning others into risk-taking
Litan's preferred fix, described in the latest edition of The
Brookings Review: mandatory federal earthquake insurance, with
premiums set to cover actuarial risks.
Just one California property owner in four carries earthquake
insurance; nationwide, the figure is below one in 20.
If such insurance is available and most people choose not to buy
it, why should the government insist?
One reason, Litan suggests, is that the private market
overprices the product. Only those at greatest risk currently buy
coverage, and insurers are apparently unwilling or unable to attract
lower-risk customers with lower premiums.
Another reason is that owners have insufficient incentives to
pay for insurance because the federal government stands ready to
reimburse them for a portion of their losses.
American taxpayers, Litan reckons, shelled out $17 each for
disaster relief in last year's San Francisco quake.
Uncle Sam could play hardball, giving legal notice that in the
future the Treasury would help only those who help themselves.
But the threat would probably not be credible: Americans are no
more likely to deny relief to uninsured victims of an earthquake
than they are to deny medical care to injured motorcyclists who did
not wear helmets. …