A long-term property earthquake insurance: illustration with the housing sector in California

For several seismic-prone countries, current earthquake insurance solutions cover only a small part of the economic loss. Innovative insurance products like parametric insurance are emerging for which the compensation is calculated upon a trigger instead of a claim amount, covering more people but with drawbacks due to probable difference between the insurance compensation and the actual loss. In this paper, new insurance model is proposed, covering earthquake risk for residential houses. Its main characteristics are: (1) the compensation is to rebuild the insured house, instead of paying a financial amount; (2) the model leverages both on long-term financial investment and seismic retrofitting of the insured buildings to make the premium amount affordable; and (3) joint participation of the public authorities and the homebuilder companies in this insurance model are expected since the first ones are the key player in risk prevention plans and the second ones are the beneficiary of this new market (incentivizing repairs/reconstruction and retrofitting works). Results show that in most cases the price (i.e. premium amount and retrofitting costs) for this earthquake insurance model is lower than the premium amount considering the traditional earthquake insurance. For the optimal deductible amount, the decrease can even be three times lower than for classical model, by assuming a contribution from both the public authorities and the homebuilder companies. Such a decrease could raise the rate of California homeowners insured against earthquake risk from 15% up to 50%.