(Bloomberg Business Week)
The Napa Valley earthquake in August offered another
instance of a well-known phenomenon: Homeowners are radically
underinsured against natural disasters. In California, 9 out of 10 homeowners don’t have earthquake coverage.
When Hurricane Sandy struck in 2012, 8 out of 10 affected residents
didn’t have flood insurance. This year’s hurricane season is forecast to
be mild, but there will be no shortage of opportunities to revisit
these statistics.
Homeowners’ insurance is normally a prerequisite
for obtaining a mortgage, but these basic policies don’t insure against
earthquake and flood, which require the purchase of separate coverage. Daniel Kahneman’s Thinking, Fast and Slow
provides insight into why so many people forgo this protection.
Intuitive, fast thinking works for most everyday actions but can fail us
when it guides decisions that we should make carefully, like
determining whether to buy insurance against low-probability
high-consequence events such as natural disasters.
When deciding
whether to take protective measures, we tend to rely on our own
experience in the recent past: We believe it will not happen to us,
because it has not happened to us recently. It had been more than 50
years since a coastal storm of Hurricane Sandy’s intensity hit the
Northeast. Adding to homeowners’ false sense of security, when Hurricane
Irene made landfall the year before, the predicted large-scale flooding
never materialized in the New York City area.
Immediately following a disaster, the calculus changes. The
uninsured who suffered damage wished they had purchased coverage, and
many decide to buy a policy. If there are no disasters within a few
years, many homeowners are likely to cancel their insurance because they
then feel their premiums have been wasted. Our analysis of the National
Flood Insurance Program database revealed that about half of new flood
insurance policies were canceled after just three or four years.
In
other words, fast thinkers view insurance as an investment rather than
as a protective measure, as revealed through dozens of empirical studies
in several disciplines. It is hard to convince individuals that they
should celebrate the serious loss that didn’t happen, rather than bemoan
the premiums paid for naught.
Are there ways to deal with this
problem? Research shows that homeowners can be persuaded to consider
insurance simply by recharacterizing the risks they face. Property
owners in a flood-prone area are far more likely to take the flood risk
seriously if they are informed that there is a greater than 1-in-5
chance (precisely 22 percent) of at least one flood occurring in the
next 25 years, instead of learning that they are in a “one-in-100-year
flood plain” (as defined by the Federal Emergency Management Agency).
These two probabilities are equal, but they don’t seem the same to
homeowners.
Thursday, September 4, 2014
The Quake that Rocked Napa
Early estimates suggest the economic losses from Sunday’s 6.0-magnitude earthquake in Northern California, the largest quake to hit the Golden State in 25 years, could hit $1 billion. When it comes to rebuilding, much of the cost will come out of people’s own pockets.
The percentage of homeowners with earthquake insurance in California and across the U.S. has declined, despite rising estimates of the risk of an earthquake.
A survey by the Insurance Information Institute, a nonprofit that’s funded by the insurance industry, found that 7 percent of U.S. homeowners have earthquake insurance, down from 13 percent just two years ago. In the West, ground zero for U.S. quakes, 10 percent of homeowners have coverage, down from 22 percent a year ago; in California, about 12 percent do, according to the California Earthquake Authority.
But as fewer people opt for earthquake insurance, the government is upping its assessment of the risk of a sizable shake. Last month, the U.S. Geological Survey updated its seismic hazard maps for the first time since 2008. The update showed an increased earthquake risk for almost half the country. Parts of Washington, Oregon, Oklahoma, and Tennessee, among others, moved into the top two hazard zones. The San Francisco Bay area, for example, shows a 63 percent chance of one or more major earthquakes before 2036, according to the agency.
So why are people buying less earthquake coverage when estimates of risk are growing?
Unlike tornadoes, hurricanes, and wildfires, which are typically covered under home insurance policies, earthquake insurance is purchased separately and often comes with a high deductible, in addition to premiums. The average earthquake policy in California in 2013 was $676 a year, according to the California Department of Insurance, and policies often have a deductible of 10 percent or 15 percent.
That means an individual with a $750,000 home in California with a 15 percent deductible would have to pay $112,500 out of pocket before getting any relief. The chief executive of the California Earthquake Authority, the largest market share writer of earthquake insurance, even said as much. “In a high-risk area, [earthquake insurance] is not inexpensive, and that’s because the risk is not insignificant,” he told Southern California Public Radio in April.
In contrast, flood insurance, which also falls outside of a typical homeowner insurance policy, had average annual premiums in 2013 of $632, according to the Insurance Information Institute. In some policies, there may only be a $1,000 building deductible and a $1,000 contents deductible, making insurance kick in quickly when the average flood claim in 2013 was $26,165.
Nationwide, about 13 percent of homeowners had a flood insurance policy last year, a percentage that’s stayed steady since 2009. This is partly because homeowners who live in designated flood zones are required to buy flood insurance as a condition of their mortgage, something that isn’t common with earthquake insurance. (That’s an unpopular mandate in areas where flood insurance premiums are spiking, such as the Florida coastline.)
After Sunday’s quake, one Napa Valley resident, Michelle Kidwell, told the Napa Valley Register, “With high premiums and a low occurrence rate, people on fixed incomes just can’t afford that luxury.” -Bloomberg
Tuesday, September 2, 2014
California Smartphones
(Reuters) - Smartphones in California will be required to come with a "kill switch" to render them useless if lost or stolen under a bill signed Monday by Governor Jerry Brown, the latest effort to stem an epidemic of phone theft in the most populous U.S. state.
The bill would be the strongest attempt yet by a U.S. state to fight smartphone theft, which accounts for more than half of crimes in several of the state's large cities.
“Our efforts will effectively wipe out the incentive to steal smartphones and curb this crime of convenience, which is fueling street crime and violence within our communities,” said Democratic state Senator Mark Leno, the bill's author.
Under the new law all smartphones sold in the state after July 2015 will come pre-equipped with technology allowing them to be shut down remotely in the event of theft.
The bill received wide support from California prosecutors and law enforcement agencies that hoped it could help reduce smartphone thefts.
According to the National Consumers League, handheld devices were stolen from 1.6 million Americans in 2012. In California, smartphone theft accounts for more than half of all crimes in San Francisco, Oakland and other cities.
Other states experiencing a rash of smart phone thefts have considered similar measures, and Minnesota passed a theft-prevention law in May. California’s new law, though, will go further, requiring manufacturers to notify consumers that the technology is available on their phones, hopefully prompting consumers to enable the kill switch.
The wireless industry removed its opposition to the bill after Leno agreed to postpone its effective date until July of 2015, the senator said.
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