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The price of disaster

WHEN MY HOMEOWNER'S insurance rates were jumping nearly 10 percent a year, while the general cost-of-living index and even the building-replacement cost index were creeping up at half that rate, I asked my agent what was happening. The national insurance company, he replied, had a bad year with claims for Florida hurricane and Midwest flood damages.

He could well have mentioned California earthquake losses. ZTC These distant disasters, too, seemingly unrelated to my house's risk of damage, claims experience or local replacement costs, helped to push up my insurance rates.

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The economic impact of increasingly frequent and costlier natural disasters is being felt by millions of Americans whose homes and lives do not share that high-risk exposure.

By one calculation, natural disasters in the United States have cost each taxpayer about $90 a year over the past six years. While that may be an acceptable cost for some, the figure is expected to rise significantly -- and to benefit many of the same areas and individuals who have received such government relief in the past.

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That per-capita contribution, of course, is compounded by insurance-company losses that must be passed on in some manner to other policy holders, since insurance rates have not been adequate in some high-risk areas to cover the true costs. Those losses are partly the result of unwise marketing decisions of greedy insurance companies, and of the under-market, politically influenced rates of the National Flood Insurance Program.

Many of the people who receive federal emergency relief do not carry disaster insurance at all. Despite national flood insurance with low rates, fewer than 10 percent of structures in the flood areas of Missouri and Illinois now have coverage. About 75 percent of the victims of the Northridge, California, earthquake in 1994 had no disaster insurance.

Some of this inaction stems from pure fatalism of those living in such areas. Part of it is the belief that the federal government will always be there in emergencies to provide a bailout. Other home owners simply can't find coverage, as insurers retreat from disaster-prone states, or premiums become unaffordable for the minority of residents who wish to insure their homes.

But resistance to such unchecked entitlements is building. Last year federal legislation was enacted to require those who received flood-emergency relief in 1993 to obtain insurance or be disqualified from receiving future government disaster assistance.

This year, more than 250 congressmen and senators are sponsoring a bill to create a national insurance system for earthquake and hurricane, which would require those living in high-hazard areas to assume the risk by purchasing disaster insurance. The privately funded, federally backed insurance corporation would make available insurance at fair rates, reducing the general taxpayer's relief burden. (Residents of low-risk areas would not pay for coverage.)

The legislation also aims to prevent damages by providing grants to states to enforce building codes, to control land use in risky locations, and encourage retro-engineering of vulnerable structures. Losses in major U.S. natural disasters could be reduced by 30 percent or more simply by proper enforcement of existing building codes, experts say.

Prospect of catastrophe

The prospect of a catastrophic disaster that could topple the property-insurance industry and strain the public treasury is winning support for this approach.

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Prior to 1989, no disaster costing over $1 billion was forecast. Since then, 11 such events have cost more: Northridge and Hurricane Andrew each had losses of $15 billion or more.

The $150 billion damage caused by the Kobe, Japan, earthquake in January approached the total net worth of U.S. property insurers. Stanford University researchers recently calculated potential losses as high as $220 billion from a severe quake that could occur along a known fault-line running through Los Angeles county.

Continued migration to high-exposure areas for quakes and storms adds to the possibility of escalating damages that are not being insured by those who make those residential decisions. Within 15 years, the government estimates that 73 million Americans will live in hurricane-prone areas.

While natural disasters are inevitable, losses can be minimized through human preparation. A soundly funded, risk-based national insurance program with strong incentives for exposed property owners to participate is one such measure. That principle should also apply to existing flood insurance, as well as to the creation of new insurance programs for hurricane and earthquake.

Michael K. Burns writes editorials for The Sun.


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