Earthquakes, Floods Highlight Wide Insurance Protection Gap

Recent natural catastrophes in and around North America have shined new light on two natural perils not covered by traditional U.S. homeowners insurance policies: floods and earthquakes.

Catastrophe modeling firms have estimated that the amount of economic losses associated with Hurricane Harvey, which led to widespread flooding along the Texas Gulf Coast, would greatly exceed the magnitude of insured losses. A similar phenomenon — in that there would be a wide gap, similar to the Harvey floods, between insured and economic losses — would likely emerge should an earthquake of a magnitude equal to or greater than that of the Sept. 19 Mexico City tremor strike the United States.

Relatively low levels of consumer purchases of residential flood and earthquake coverage contribute to a growing underinsurance problem that serves as a global challenge, even within developed countries like the United States, for governments and their populations. The resulting protection gap creates potential societal and macroeconomic hurdles that may be difficult for individual counties to overcome, particularly in the event of a severe catastrophe.

Insurance industry participants have speculated that a range of factors might be keeping homeowners from buying flood and earthquake coverage, including the following reasons: A lack of knowledge about what their insurance coverage includes and excludes; an expectation of state or federal government support in the event of a disaster; or simply the notion that “it’s not going to happen to me.” The cost of the coverage is also a factor, particularly given a perception of the necessity of coverage for earthquakes or floods.

Whether the root cause is wishful thinking or blissful ignorance, recent events should lead consumers to review the scope of their existing coverage and explore the additional coverage options that may be available. The insurance industry has also sought to broaden the use of public/private partnerships to address certain instances of underinsurance, but those can be a tough sell from a political perspective.

Technological solutions might also offer a helping hand in this regard. Executives at Swiss Re, for instance, have expressed hope that “digital advisors” can better inform consumers about their financial needs, in general.

The evolution of that technology will take time, however, and as the recent earthquakes in Mexico demonstrated, “the big one” could hit tomorrow.

Data compiled by the California Department of Insurance in July finds that only 10.8 percent of the residential property insurance policies in force in the state during 2016 also had earthquake coverage. California accounted for 57 percent of the total earthquake insurance premiums written by U.S. insurance companies in 2016, so the penetration rates are undoubtedly much lower in other states.

In Oklahoma, which ranked second only to Alaska in recent years in the number of earthquakes recorded annually, earthquake premium writings more than doubled between 2012 and 2016. But during the same five-year stretch, the quantity of earthquakes of magnitude 3.0 or higher surged by 1,680 percent.

National Flood Insurance Program penetration rates varied widely in the parts of Texas most impacted by Harvey, which dumped torrents of rain after essentially stalling over the state. Four out of every 10 Galveston County housing units had National Flood Insurance Program policies, but just over one in 10 did so in Harris County where Houston is located. Although personal auto policies provide comprehensive coverage for flooded vehicles, it may offer little solace to those Texas residents who are also facing devastating water damage to their homes.

As natural disasters are seemingly becoming more powerful and occurring more frequently, the protection gap will continue to widen as total losses may outpace insurance coverage in the United States.