Earthquake futures, a shaky new risk


SAN FRANCISCO -- Risk-lovers, take note. Looking for an investment that's even chancier than junk bonds, penny stocks or derivatives?

How about . . . earthquake futures?

Seeking a solution to California's earthquake and homeowners insurance bottleneck, Insurance Commissioner Charles Quackenbush is considering a wide range of new ideas, including a high-risk, high-yield way for Wall Street investors to back up this state's insurers.

In an interview with The Sacramento Bee, Mr. Quackenbush said this week that he is talking with various New York financial institutions about the idea of getting investors to take on some of the earthquake risk that traditional insurance companies don't want to handle.

"There's only so much earthquake insurance that companies can write. I don't think the traditional ways of selling insurance are going to do," Mr. Quackenbush said. "We're looking at something along the lines of 'earthquake futures,' or a syndicate like Lloyd's of London. . . . People would be buying shares of exposure to earthquakes. They'd have premiums coming in to back it up. Then they would have to be there to pay off any claims."

Mr. Quackenbush, who was elected last November, was responding to the increasingly tight market for homeowners and earthquake insurance in California.

After last year's unexpectedly costly Northridge earthquake, many insurance companies decided that they could not afford to keep offering quake insurance in California. That in turn affected the homeowners insurance market, because of a state law requiring companies selling such insurance to also offer their customers the option of quake coverage.

Since the Northridge quake, companies serving about 70 percent of the homeowners market have halted or severely restricted their sales of new homeowners and quake policies. Other companies are seeking rate boosts that would in many cases double the cost of quake insurance.

Insurance companies have said the solution to the homeowners' part of the problem is to repeal the law requiring them to offer quake insurance -- "de-linking" homeowners from earthquake policies.

But one idea Mr. Quackenbush said he is considering is the "earthquake futures" idea. Large investors might buy shares in some kind of reinsurance syndicate that would step in if regular companies reached their limit in quake claims. The investors would receive annual payments from insurance companies that sell quake policies, but they would risk big out-of-pocket costs in the event of a major quake.

Industry officials were taken aback yesterday by news of Mr. Quackenbush's interest in the earthquake futures idea.

"That was the main component of a White House briefing a month ago that got largely pooh-poohed," said Jim Snyder, president of the Personal Insurance Federation of California.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad