NAIC Adopts Consumer Guide to Earthquake Insurance

Just weeks after a massive earthquake struck Japan, setting off a tsunami and severely damaging a nuclear power plant in the northeast region of that country, the National Association of Insurance Commissioners adopted its first consumer guide to earthquake insurance.

According to Angela Nelson, director of consumer affairs at the Missouri Department of Insurance, the guide is designed to educate consumers about the need to consider purchasing earthquake insurance.

During a series of March 28 meetings at the NAIC's spring meeting in Austin Texas, regulators discussed the United State's vulnerability to earthquakes, particularly in California -- perhaps the most seismically active state.

Dennis Burke, vice president of state relations at the Reinsurance Association of America, argued that businesses in the United States should consider buying earthquake insurance, pointing to the Japan earthquake, which is estimated to have caused up to $300 billion in economic losses. But such coverage is not enough in similar disasters; those insurers need reinsurance, Burke said.

Because many Japanese businesses and individuals hadn't bought insurance or reinsurance, the global reinsurer impact of the event is just $15 billion to $20 billion, Burke said.

"This is truly a disaster some would call biblical," Burke said. "The big question is why is the reinsurance impact so small? It comes down to the fact that people didn't buy reinsurance and transfer the risks outside of the country." He noted the nuclear reactor is primarily covered by a government-run nuclear insurance pool in Japan.

At this point, the impact of the Japan earthquake on reinsurers will not affect the capital the RAA's members on hand. The impact will be limited to earnings those reinsurers had expected to make, Burke said.

The three key risks posed by a disaster as large as the Japan earthquake are physical damage, business interruption and contingent business interruption. The latter category includes supply chain interruptions and is largely covered by optional policies around the world.

Because it is not yet clear which businesses will be affected by supply chain interruptions and which of those had contingent business interruption coverage, "there is a great deal of uncertainty in the true impact of contingent business interruption," Burke said.

Burke said there was enough reinsurance capacity in the marketplace to cover catastrophic disasters such as the Japan earthquake, but that more people needed to enter the market place to avoid the coverage issues seen in Japan.

Glenn Pomeroy, chief executive officer of the California Earthquake Authority, said what is really needed to help cover Americans in the event that the "big one" hits is a government backstop should an earthquake cause insurers and reinsurers to exhaust their coverage capabilities. Pomeroy cited as an example a bill introduced in Congress that is designed to lower the cost of earthquake insurance by providing federal backing of up to $5 billion that would kick in after a catastrophic earthquake caused a state-affiliated earthquake insurance provider to exhaust its on-hand capital, reinsurance and any additional industry assurances (BestWire, March 21, 2011).

Nations like New Zealand have similar, though much more expansive, government programs that have helped limit the uncovered damage seen after earthquakes or earthquake-induced tsunamis, he said.

When he told an audience of New Zealanders that 90% of Californians do not have earthquake insurance, "people gasped in disbelief," Pomeroy said. "They just couldn't believe a state with so much seismic activity had so little coverage. It's a ticking time bomb. We all know the big one is coming."

The NAIC's consumer guide to earthquake insurance would help individuals understand what is covered by such policies, how the policies work and other steps they can take to protect their home, Nelson said. "This will increase attention on earthquakes and earthquake preparedness," she said.

In adopting the guide, Mississippi Insurance Commissioner Mike Chaney, who chairs the NAIC's Property and Casualty Insurance Committee, called on regulators and audience members to offer financial support for the people of Japan.

"We need to be very sympathetic to people of Japan who were so sympathetic to us in my state and in Louisiana and other states in the wake of Katrina," Chaney said.

(By Jeff Jeffrey, Washington Correspondent: [email protected])