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 But that financial hit is far from enough to convince him to buy
earthquake insurance for Redwood Liquor. That would mean forking
over about 7 to 8 percent of his insured value of $100,000 in
premiums alone, he said.
"It doesn't amount to good financial sense," Masani said on Monday,
while standing beside a sidewalk dumpster where workers shoveled
broken glass and the stench of fermenting alcohol hung in the air.
"It's useless to buy insurance."
In one of the most quake-prone areas of the world, the cost of
earthquake insurance remains too high for many California residents.
Flood coverage is often more affordable and mandatory in areas of
the country where hurricanes are frequent, but only 6 percent of
Napa's residents carried coverage before Sunday's quake, the biggest
to hit the Bay Area in 25 years and the first major quake in the
state in two decades.
When The Big One hits, taxpayers may end up paying for much of the
damage.
A repeat of the 1906 San Francisco earthquake, estimated at 7.8
magnitude, would cause some $93 billion in insured losses, according
to an estimate by the Insurance Information Institute, an industry
research group. Total economic losses would be three to four times
that.
As the clamor for disaster relief rose, federal and state
governments would be under "enormous pressure", said Bob Hartwig,
president and economist of the Institute. "And that would be an
understatement," he added.
WHY SKY HIGH
Catastrophe risk analysts say there are a few reasons for the high
cost of quake insurance, notably the nature of earthquakes
themselves. The federal government also backs the market for flood
insurance but has avoided quake policies.
And mortgages from federally regulated or insured lenders, which
require flood insurance for properties at high risk of inundation,
do not require quake policies in active fault zones.
Compared to hurricanes, floods and tornadoes, earthquakes are rare,
and they inflict much more damage.
Since the 1950s, there have been 11 earthquakes in the United States
larger or equal to the 1994 Northridge quake near Los Angeles, a 6.7
magnitude which was the costliest on record. There have been about
59 major F5 tornadoes and 29 major landfall hurricanes recognized by
the National Hurricane Center.
The risk models used by insurance companies to calculate earthquake
rates are, at best, incomplete, say some analysts.
"They're usually way off in estimating earthquake losses," said
Karen Clark, CEO of catastrophe risk modeling firm Karen Clark & Co.
"The lack of data leads to high uncertainty and just in general the
higher your uncertainty, the higher the price will be." If more
people bought earthquake insurance, prices likely would go down, she
added.
She expects only 10 percent of a major San Francisco quake's damage
would be covered by insurance.
"It's a complicated risk, said Glenn Pomeroy, CEO of California
Earthquake Authority, which has over $10.4 billion in claims paying
capacity to cover its 856,000 policyholders. "That's why most
insurance companies don't want to tackle it."
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Twenty years ago, about a third of California residents were
covered, paying an average premium of $200 a year, according to
Patricia Grossi, earthquake expert and senior director at
catastrophe risk modeling firm RMS. The 1994 earthquake in
Northridge caused about $24 billion in insured losses in 2013
dollars, according to the Insurance Information Institute.
The event scared off many insurers. “Companies hadn't seen that
coming,” said Pomeroy, whose group now covers 75 percent of
homeowners who carry earthquake coverage. “Insurance companies
started filing for massive rate increases, sometimes 10-fold, and
coverage was becoming much more restrictive.”
Since Northridge, the take-up rate has fallen to about 11 percent
with annual premiums averaging $1,000, Grossi said.
By contrast, the average flood insurance premium in the United
States is $650, often with a $500-$1,000 deductible, according to
the National Flood Insurance Program, which has federal backing.
Earthquake coverage carries a deductible of about 10 to 15 percent.
So the owner of a $1.3 million home with a 15 percent deductible,
must pay $195,000 before the insurance ever kicks in. In some cases,
deductibles for earthquake coverage can be upwards of $500,000 a
year, said realtor CJ Nakagawa from the Susan Hewitt Luxury Group.
"Imagine that you've spent $400,000 over 20 years on your policy,"
Nakagawa said. "An earthquake hits and you're left with $400,000 in
damages but your deductible is $500,000. That's $900,000. For that
money, you could build a new home from scratch."
For many residents, the value of adding insurance is diminished
because the U.S. federal government typically extends disaster
relief. In a town hall meeting on Monday, many Napa officials and
residents said they were counting on assistance from the U.S.
federal government.
That's a common false assumption, the U.S. Government Accountability
Office found in 2010, noting that a high percentage of property
owners rely "on good fortune or federal emergency disaster relief
assistance to cover uninsured losses."
(Reporting by Deepa Seetharaman, Robin Respaut, and Christina Farr,
editing by Peter Henderson)
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