Non-Compulsory Earthquake Insurance Could Cripple Market

The lack of mandatory earthquake insurance in California would result in high levels of mortgage defaults that would further cripple the United States housing market if a major earthquake occurred, according to an analysis released by the Chicago-based "Impact Forecasting LLC":http://www.aon.com/impactforecasting/impact-forecasting.jsp, a division of international reinsurance intermediary and capital advisor "Aon Benfield":http://www.aon.com/.
According to Aon's "_Annual Global Climate and Catastrophe Report: 2008_":http://www.aonbenfield.com/attachments/Annual_Global_Climate_Catastrophe_Report_08.pdf, homeowners that are victims of earthquakes and default on their mortgages do so because:
- They couldn't manage both their mortgage and home repair payments
- Decided it was easier to walk away from their damaged home and mortgage
- Lost their job due to the disaster
When the Northridge Earthquake of 1994 hit the Los Angeles area, it left 72 dead and 9,000 injured, and according to the report, caused $400 million worth of mortgage defaults due to foreclosure expenses, property repair costs, lost interest income, and write-downs of existing loan balances.
If another similar catastrophe occurred during the current housing crisis, the report estimates many homeowners would walk away from their homes, leaving the financial burden on banks.
According to the report, less than five percent of California homeowners carried earthquake insurance in 1976. In 1984, a new state law required insurers to offer the earthquake protection with new homeowners insurance policies, as well as once a year thereafter.
In 1990, about 20 percent of homeowners carried earthquake insurance, and that percentage spiked to 30 percent after the 1994 quake, but has since retreated to its current level of 14 percent, the report said.
Annual earthquake insurance premiums in California range from about $200 to more than $2,000, depending on the property's location and age of the home.
The report said since state law doesn't require it, most lenders don't require it because:
- Homes built after 1940 conform to more strict building codes and are considered less vulnerable to complete failure during an earthquake
- Lenders believe homeowners that have positive net equity in their properties are less likely to default on their mortgages
- A localized catastrophe would have less of an impact on larger lenders that spread their financial risks over a wide range of investments and geographic areas.
The report predicts if an earthquake hit California, it would "send shockwaves throughout the financial and insurance industries."
"It is hard to believe that there could be further downside for investors in mortgages than experienced in 2008, but the earthquake risk to the mortgage market is real," Bryon Ehrhart, CEO of Aon Benfield's Analytics division, said.