Why is it important for British Colombians to buy earthquake insurance; Washington does not do that

The Pacific Northwest is a region blessed with stunning natural beauty and cursed with intense risks from powerful earthquakes.

But although Canadians and Americans living in the area share roughly the same risks from a major earthquake, the 49th parallel that delineates the Canada-US border also marks another line – more than 60 percent of homeowners in the lower mainland who buy from British Colombia earthquake protection insurance for their homes and properties, while less than 14 percent of residents of western Washington state do the same.

In insurance parlance, this means that there is a “protection gap” in both British Columbia and the state of Washington, although the gap appears to be more than a large gap for Americans.

What is the “protection gap”?

As losses from natural hazards are on an upward trajectory, globally and in Canada, the protection gap has been a popular topic in the insurance industry in recent years.

This gap is defined as the portion of total losses resulting from an event such as a hurricane, flood or earthquake that is not covered by insurance. Globally in US dollars, this gap reached $ 171 billion in 2020 for all natural disasters, with only $ 97 billion out of a total of $ 268 billion in damages.

Over the past decade, only $ 102 billion in losses of $ 535 billion were covered by earthquake insurance alone.

This is a problem because, essentially, the larger the gap, the more disaster-related costs a community bears out of pocket. According to research, when more people buy insurance, society tends to be more resilient, prompting it to recover faster after a heavy loss compared to places where fewer people buy purchase coverage.

People experience the feeling of an earthquake when they stand inside an earthquake simulator in Vancouver in May 2015. Canadian Press / Jonathan Hayward The danger is there, so why not cover it?

There are many theories as to why fewer people buy earthquake insurance in earthquake-prone countries due to the greater risk.

Our team (including Stephen Bowen, head of catastrophic insight at Aon, a global professional services company) looked at many potential impacts on the earthquake insurance purchase decision, including socio-economic factors (such as age, education, and income), earthquake risk perceptions, and predicted Government rescue operations via disaster assistance programs, as well as issues related to product cost and the unattractiveness of policy design.

Our work finds very little difference in most of these factors in the United States and Canada, so these small differences do not explain the large variation in absorption rates in British Columbia and Washington.

Damage to Seattle’s Pioneer Square is seen after the 2001 Niskwale earthquake. Seattle Municipal Archives, CC BY-SA

The only significant difference found between the two regions is the wider availability of government disaster assistance in Washington during British Columbia While there are numerous aid and grant programs to help uninsured or uninsured people in the United States, the British Columbia government has publicly stated that it will not Pay assistance for earthquake damage due to the availability of private insurance.

We believe this and issues centered around national culture are two of the main reasons why earthquake insurance acceptance rates are so low in Washington.

The Canadian constitution heralds “peace, order, and good government” in Canada, while the American Declaration of Independence affirms “life, liberty, and the pursuit of happiness.” Because Americans tend to be individualistic and less likely to trust information provided by authorities, they are more likely to underestimate potential risks.

This has resulted in not only low earthquake insurance acceptance rates in western Washington, but also in California, where only 10 percent of households have adequate coverage.

Visitors crossing a highway with a large crack caused by a July 2019 earthquake near Ridgecrest, California (AP Photo / Marcio Jose Sanchez) narrowing the gap

Given the global increase in economic losses due to natural disasters, it is imperative to narrow the insurance protection gap. When losses are insured, people and organizations do not need to pay for losses out of their pockets. Reducing the protection gap reduces the burden on taxpayers and enhances societal resilience.

While the protection gap exists for many reasons, potential solutions have been explored around the world to reduce it. For example, mortgage lenders can request, or governments can require, to purchase insurance.

Changes in product design can also motivate more homeowners to purchase earthquake insurance, from bundling all potential disasters into a basic insurance policy to changing the policy duration from a typical year to multiple years and offering “insurance vouchers” to high-risk but low-income households. .

There may also be a role for governments to act as insurers, provide liquidity or solvency to insurers, or provide coverage through property taxes.

Our findings go beyond the issue of earthquake risk and are relevant when considering the impact of climate change, because the phenomenon will increase in the face of extreme weather events around the world.

The increased risk will require both insurance companies and governments to take steps to ensure adequate protection against catastrophic losses.

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