Contingencies Online - July/August 2011

As a side note, while the majority of homeowners in Califor-
nia don’t have earthquake coverage, their homeowners’ policies
automatically cover them for one of the biggest post-earth-
quake hazards—fire. And tsunami damage is insured through
the National Flood Insurance Program.
“There have been problems with hurricane coverage in
other states because of disputes over whether the damage was
from wind or storm surge,” Ackerman says. “It’s possible similar
coverage disputes would arise following an earthquake in those
cases in which both an earthquake and tsunami occurred.”
Only residential earthquake risk is insured through the CEA.
Because insurers have never been required to offer earthquake
insurance to commercial enterprises, the commercial insurance
market was spared the disruptions that hit the residential in-
surance market in the wake of Northridge, Ackerman says. But
Northridge did serve as a wake-up call, prompting a general re-
consideration of earthquake exposure throughout the insurance
industry. Both residential and commercial risks experienced
Sizing Up Personal
Seismic Risk
The California Earthquake Authority poses the
following questions to help guide homeowners
in determining how much earthquake coverage
they will need to buy.
■ ■Can you afford to replace your household
possessions (such as sofas, beds, TVs, furniture,
refrigerators, and clothing) if they are destroyed
in an earthquake? How much would they cost?
■ ■ If you have to find temporary
accommodations because you cannot live in your
home as the result of an earthquake, how much will
you need to pay for those additional living expenses?
■ ■ If you own your home, how much home equity do
you have? Can you afford to risk losing that equity if
an earthquake damages or destroys the home?
■ ■ How much would it cost to rebuild your home? Do
you have assets available to repair or even rebuild
your home after an earthquake?
■ ■ Do you have a mortgage, second mortgage, or line
of credit on your home? Can you afford to continue
repaying those loans while also paying to rebuild or
replace your home?
pricing changes, coverage was revised to increase deductibles, and
in the ensuing years underwriting has become more rigorous.
Working on the federal level, California’s two Democratic
senators, Dianne Feinstein and Barbara Boxer, on March 17, 2011,
introduced the Earthquake Insurance Affordability Act (S. 637),
which would grant qualifying state earthquake programs loan
guarantees for debt issued after an event to assist in the financial
recovery from earthquakes and collateral perils. The legislation,
which would lower the cost of earthquake insurance (while still

Academy Activity

The Academy’s Extreme Events Committee, chaired by Shawna Ackerman, identifies and monitors potential natural catastro-
phes of low frequency but high severity that could generate extremely large property/casualty losses. The committee considers
a number of issues related to managing the risk of extreme events, including sizing, insurability, pricing, funding, reserving, capital
management, and loss mitigation. As part of these efforts, the committee and its subcommittees work closely with the National
Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) monitoring federal and
state catastrophe legislative initiatives. Recent Academy communications on the topic have included:
■ ■ A Nov. 18, 2009, letter to
NCOIL commenting on its
proposed system for public-
private natural catastrophe
financing (http://www.
actuary.org/pdf/casualty/
ncoil_nov09.pdf);
■ ■ A June 30, 2008, letter to
the NAIC about its climate
risk disclosure proposal
( http://www.actuary.org/
pdf/casualty/climate_
june08.pdf);
■ ■ A May 23, 2008, letter to
NCOIL offering input on
its proposed resolution
regarding a new approach
to state catastrophe funds
( http://www.actuary.org/
pdf/casualty/ncoil_
may08.pdf);
■ ■ A July 11, 2006, letter to
the NAIC about a joint
NAIC/NCOIL discussion
paper on the creation of a
national catastrophe plan
( http://www.actuary.org/
pdf/casualty/cat_naic_
july06.pdf).