Abstract
Abstract. Despite California being a highly seismic prone region, most homeowners are not covered against this risk. This study analyses the reasons for homeowners to purchase insurance to cover earthquake losses, with application in California. A dedicated database is built from 18 different data sources about earthquake insurance, gathering data since 1921. A new model is developed to assess the take-up rate based on the homeowners’ risk awareness and the average annual insurance premium amount. Results suggest that only two extreme situations would lead all owners to cover their home with insurance: (1) a widespread belief that a devastating earthquake is imminent, or alternatively (2) a massive decrease in the average annual premium amount by a factor exceeding 6 (from USD 980 to 160, 2015 US dollars). Considering the low likelihood of each situation, we conclude from this study that new insurance solutions are necessary to fill the protection gap.
Highlights
Since 2002, the rate of homeowners insured against earthquake risk in California has never exceeded 16 %, according to data provided by the California Department of Insurance (CDI, 2017b, California Insurance Market Share Reports)
The model developed in the present study shows that the low earthquake insurance take-up rate, observed until 2016 for the homeowner line of business in California, is due foremost to high premiums
No homeowner would prefer to stay uninsured against earthquake risk if the annual average premium were to decrease from USD 980 to USD 160 (USD 2015) or lower
Summary
The main objective of this study is to introduce a new take-up rate model for homeowners at the scale of California state Such spatial resolution allows work on most data available in financial reports, which are numerous enough to use both the premium amount and the risk perception as variables. Different from previous studies focusing on risk pricing (Yucemen, 2005; Petseti and Nektarios, 2012; Asprone et al, 2013), this study takes into account the homeowners’ risk perception and behaviour This shift in point of view approach changes the main issue from what the price of earthquake insurance should be considering the risk level to what the acceptable price for consumers to purchase an earthquake insurance cover is. The last section is dedicated to analysing the current low earthquake insurance take-up rate for California homeowners
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