The Earthquake Insurance Protection Gap: A Tale of Two Countries

Abstract

In this paper, we examine reasons why take-up rates for earthquake insurance are significantly higher in the Lower Mainland of British Columbia than in western Washington state even though earthquake risk is largely the same. Achieving and maintaining high insurance take-up rates for catastrophic events matters because this can play an important role in improving the resiliency of communities. After exploring several factors known to influence the supply and demand of insurance for high-severity but low-frequency events, we find only two key differences: 1) disaster assistance is more readily available in the U.S.; and 2) Canadians are more willing to purchase earthquake insurance when they are told they should. We conjecture that many policy options to increase insurance take-up rates, such as product redesign or cross subsidization, are not likely to be effective in Washington. Making insurance mandatory—either via legislation, making earthquake coverage a prerequisite for a mortgage or embedding it into property taxes—might be the only viable way to increase take-up rates, although these options may be politically difficult to enact.

Addressing the New Madrid seismic zone earthquake protection gap

“…So, if cost of coverage is not the only factor driving earthquake insurance uptake, what else matters? Kelly et al (2020) investigate the market penetration differences in the western Washington state area compared with the lower mainland of British Columbia, which both face the same earthquake risk of the Cascadia subduction zone. They discuss several potential factors in addition to cost that influence the decision to purchase earthquake insurance, including: the price and design of earthquake insurance coverage; household demographics and income constraints; risk perceptions, including catastrophe experience; messaging by insurers, governments, and media; whether a culture of preparedness exists; expectation of post-disaster relief; and investments in mitigation.…”

“…All told, the Missouri DCI insurance coverage data and the existing literature illustrate that there are a multitude of factors that potentially drive earthquake insurance coverage demand. Moreover, to better assess these aspects, it is recommended that the collection of primary survey data related to these potential factors driving earthquake insurance uptake should be undertaken (Kelly et al, 2020). Consequently, the primary purpose of this research project is to understand the potential determinants of earthquake insurance uptake in the NMSZ via a comprehensive mixed-method primary data collection strategy.…”

“…Given the significant earthquake risk in the NMSZ, what is driving the earthquake insurance coverage protection gap? Of course, the cost of (disaster) insurance is a key factor in its uptake (Kelly et al, 2020;CREW, 2021). In Missouri, concurrent with the decline in earthquake insurance coverage over time, the Missouri DCI (2022A) finds that since 2000, the cost of earthquake insurance has risen on average by 352% across the entire state and by 816% in the New Madrid counties alone.…”

“…Clearly then, an increasing cost of earthquake insurance coverage is not the only factor determining declining earthquake insurance uptake. For example, Kelly et al (2020) identify several potential factors in addition to cost that influence the decision to purchase earthquake insurance, including: the price and design of earthquake insurance coverage; household demographics and income constraints; risk perceptions, including catastrophe experience; messaging by insurers, governments, and media; whether a culture of preparedness exists; expectation of post-disaster relief; and investments in mitigation.…”

A stochastic exposure model for seismic risk assessment and pricing of catastrophe bonds

“…1 Ten most expensive earthquakes to the insurance industry worldwide between 1980 and 2020 (Statista 2022) penetration. Some of the main factors of low insurance penetration includes affordability, low risk perception, design and structure of the cat bonds (Bevere and Grollimund 2012; Kelly et al 2020). These factors are influenced by uncertainty and low confidence in the loss estimates, which tend to increase the price of insurance policies, making them less attractive to potential customers.…”