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Lou Cannon: Earthquake in Haiti Portends Need for Low-Cost Insurance Here

Devastation a difficult reminder that it can happen here, and our economic price could be much worse

The human suffering caused by the earthquake in Haiti has touched the sensibilities of people throughout the world. Vivid media coverage has brought the horror and hunger of Haiti — along with occasional glimmers of hope — into the living rooms of Americans. This in turn has produced an outpouring of hundreds of million dollars in charitable contributions, exceeding even the donations after the destructive Indian Ocean tsunami of 2004, as well as American volunteers who have provided medical and humanitarian aid and may eventually assist in the rebuilding of Haiti.

Lou Cannon
Lou Cannon

The Haitian earthquake is a reminder that natural calamity can strike anywhere at any time. In California, the long-expected “Big One” is a matter of when, not if. A 2007 scientific study determined that California has a 99.7 percent chance of an earthquake of 6.7 magnitude within 30 years and a nearly even chance of a quake of 7.5 magnitude or greater within 30 years.

Buildings in California are generally less flimsy than in Haiti, but a major earthquake nonetheless would probably cause widespread destruction, disrupt ground transportation, and sever gas and water lines. A “shakeout earthquake scenario,” issued by seismologists in 2008, said that a likely 7.8 quake on the southern San Andreas Fault would kill 1,800 people and injure another 50,000. It would also destroy thousands of homes, most of them uninsured for earthquakes.

Except for San Francisco in 1906, where 3,000 people died from an earthquake of an estimated 7.7 magnitude, most of them in the resulting fire, the United States has been fortunate in that its largest quakes have occurred in sparsely populated areas.

The Great Alaska Earthquake of 1964 had a magnitude of 9.2 and might have killed or injured hundreds of thousands in an urban setting. The death toll from the quake and resulting tsunamis was 131.

Geologists believe that even more severe quakes, three of them, occurred on the New Madrid Fault in southeast Missouri, about 175 miles from St. Louis, in 1811 and 1812. Since almost no one lived there at the time, casualties were minimal.

In this century the most devastating natural disaster in the United States was not an earthquake but Hurricane Katrina, which in 2005 claimed more than 1,800 lives and devastated the Gulf Coast from central Florida to Texas, leaving scars that remain especially visible in New Orleans. The phrase “natural disaster” does not tell the full story. The neglect of the levees that were supposed to protect New Orleans as well as the channeling of the Mississippi River and the erosion of the barrier reefs by oil drilling were man-made invitations to disaster. It could happen again. Nor is the threat of breached levees limited to Louisiana; more than half the nation’s counties have levees, some in disrepair. Both the Atlantic and Gulf coasts face a perennial threat from hurricanes. This year’s early forecast puts the chance of a major hurricane making landfall at 40 percent.

Natural calamities cannot be prevented, but public policies can be devised that enable survivors to rebuild their homes and lives.

“Many people have a false expectation that the federal government will come swooping in after a disaster,” said Glenn Pomeroy, who heads the California Earthquake Authority. “That usually doesn’t happen.”

Pomeroy knows what he’s talking about. He was North Dakota state insurance commissioner in April 1997 when the swollen Red River surged over its banks and flooded much of Grand Forks, N.D. Residents with flood insurance were able to rebuild, while many of the uninsured could not.

It would be worse in California after a major urban earthquake; only 12 percent of Californians with homeowners insurance also have quake insurance, most of it by the California Earthquake Authority (CEA). This quasi-public agency was established after the Jan. 17, 1994, Northridge earthquake, a magnitude 6.7 temblor that killed 72 people, severed gas and water lines, and knocked seven freeways out of service.

Your columnist covered this calamity as a reporter for The Washington Post and has enduring memories of a grim scene at the Northridge Meadows apartments, where I watched bodies being pulled from the wreckage of a building in which the second and third floors had collapsed on the first, killing people in their sleep. Sixteen people, many elderly, died in this one apartment building, which was un-reinforced and perched on top of a parking area. The California Seismic Safety Commission says such buildings are inherently unsound and are prevalent throughout the state.

Earthquake insurance in California, where a majority of residents live within 20 miles of a major fault, has been problematic since its inception. Premiums for this insurance, sold through the CEA through commercial companies, cost several hundred dollars a year and the deductible is 15 percent of the home’s insured value. Even homeowners with insurance would face substantial out-of-pocket expenses after an earthquake. Overall, according to a CEA estimate, a maximum of 10 percent of residential losses and 20 percent of commercial losses would be covered by insurance after a projected 7.2 quake on the Hayward Fault in Northern California. In Katrina, slightly more than half the losses were covered by insurance, including payouts from the National Flood Insurance Program.

A principal barrier to providing affordable earthquake insurance in California and affordable storm-damage insurance in the Gulf Coast states is the high cost of reinsurance, which insurance companies buy to protect themselves from claims they can’t meet. In California, 40 cents of every dollar charged for earthquake insurance is spent on reinsurance. To reduce premiums, the CEA is seeking a federal guarantee for bonds that could be sold to reimburse losses after a major earthquake. If the earthquake authority had this power — guaranteeing bond sales with the full faith and credit of the federal government — it could reduce premiums and deductible amounts for earthquake insurance. This in turn would enable millions of uninsured Californians to buy such insurance.

Three of the Gulf Coast states — Florida, Louisiana and Texas — have quasi-public agencies similar to CEA to provide insurance from storm damage. The Louisiana Citizens Property Insurance Corp. sold $1 billion worth of bonds after Katrina to provide reimbursements for its 125,000 policy holders.

“It would be a question in today’s financial markets if we could sell these bonds as readily without a federal guarantee,” said John Wortman, chief operating officer of Louisiana Citizens.

Legislation to provide such a guarantee had been introduced in the U.S. Senate by the four senators from California and Florida and in the house by Rep. Loretta Sanchez, D-Calif., with several co-sponsors. Backers of the bill recognize that it may be an uphill struggle to obtain congressional passage of the measure in the tempestuous political environment of an election year. By starting now, they hope to win approval by 2011.

The legislation, known as the Catastrophe Obligation Guarantee Act (COGA) is no giveaway. An evaluation (“scoring”) by the nonpartisan Congressional Budget Office found it would cost $25 million over 10 years, a small amount in comparison to the billions of dollars that would be required for rebuilding a state shattered by an earthquake or a hurricane. The legislation has a safeguard: any public entity that seeks a federal guarantee for bond sales would need pre-certification from the U.S. Treasury that it is charging sound rates for its insurance products.

In a year when the domestic headlines are dominated by the economy and the uncertain fate of health care reform, COGA is a backburner item. But Haiti is a reminder that we never know when and where disaster will strike. The Big One is coming, and we should prepare for its aftermath.

— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.

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