Multi broker trading earthquakes
In California, earthquake insurance was offered even before the San Francisco Earthquake, with major problems paying claims from that disaster, as pointed out above. But since then, earthquake insurance has been profitable for the insurance industry, up until the Loma Prieta Earthquake, followed by the Northridge Earthquake.
Between and , claims and payments were far less than premiums, even including three large earthquakes Sylmar, Coalinga, Whittier Narrows , two of which struck densely populated areas.
In , as a result of the Loma Prieta Earthquake, claims and payments exceeded premiums for the first time since But the Northridge Earthquake really broke the bank: One insurance company severely underestimated its potential for losses from the Northridge Earthquake; it would have gone out of business except for a buyout from another carrier.
If a similar size earthquake had struck a major urban area on the heels of the Northridge Earthquake, even some major companies would not have been able to cover their losses. Northridge losses were covered in part by the use of income from investments to pay claims. About 20 percent of the loss was paid from other types of insurance, including insurance against fire, property damage and liability, commercial and private vehicle losses, loss of life, disability, medical payments, and so on.
These figures point out another trend in the earthquake insurance market: The legislature refused for the reason that it would have left millions of homeowners unable to buy earthquake insurance at an affordable price. Insurance companies and homeowners took their concerns to the California legislature in Sacramento. The legislature then established a reduced-coverage catastrophic residential earthquake insurance that would cover the dwelling but exclude detached structures.
Despite strong public support, the mini-policy did not lure insurance companies back into the residential insurance market. By mid, the lack of availability of residential insurance was threatening the vitality of the California housing market. This was accomplished without the use of public funds. Insurance companies representing more than 70 percent of the residential property insurance market agreed to participate by signing a Participating Carrier Agreement to write policies on all eligible categories in the CEA.
Insurance premiums have more than doubled, and payouts are expected to be lower. One estimate for residential claims if the CEA had been in operation at the time of the Northridge Earthquake: The figures below are based on data soon after the establishment of CEA, with the idea that the insurance philosophy is the same although coverage, deductibles, and rates would change. Structural damage to residences is covered, with a deductible of 15 percent of the value rather than 10 percent.
Swimming pools, fences, driveways, outbuildings, and landscaping are not covered at all. Claims are processed by individual insurance companies and paid by the state. Participation by insurance companies is voluntary, but insurers representing two-thirds of the market—including the three largest insurers, State Farm, Allstate, and Farmers—are committed to the CEA.
Some insurance actuaries believe that the premiums are still too low to protect against catastrophic losses; that is, CEA is still not cost based. The higher cost has been criticized by consumer advocates such as United Policyholders; it has driven many homeowners away from obtaining or renewing earthquake coverage. At present, no more than 12 percent of California homeowners have bought earthquake insurance.
But the question remains: Will they walk away from their damaged homes? Will the state and federal government bail them out? The number of homeowners who walked away from their homes during the recent Great Recession may represent the wave of the future. Under the CEA, insurance premiums vary from region to region; California is divided into nineteen separate rating territories. Much of the San Fernando Valley, which suffered two damaging earthquakes in less than twenty-five years, is paying 40 percent more than most of the rest of the Los Angeles metropolitan area.
But the city of Palmdale, in the Mojave Desert adjacent to that part of the San Andreas Fault that ruptured in in an earthquake of M 7. San Francisco Bay Area residents are paying rates four-and-a-half times higher than residents of Eureka, opposite the Cascadia Subduction Zone on the northern California coast—an area that has experienced the greatest number of large earthquakes in California, and indeed, in the United States.
The north coast was struck by a M 7. Perhaps the lesson to be learned here is that if your area has recently had an earthquake, earthquake insurance will be very costly, but if not, earthquake insurance could be a bargain.
In other words, the insurance industry is more sensitive to historical earthquakes and instrumental seismicity than it is to geological evidence for prehistoric earthquakes and slip rates on active faults.
Revised models will undoubtedly make regional differences in earthquake insurance rates more realistic. The age and type of home also affect rates.
The percent damage to homes from the Northridge Earthquake was 35 percent for buildings constructed before to 20 percent for houses that had just been completed at the time of the earthquake. The differences in insurance rates recognize the value of well-constructed houses in which earthquake risks have been taken into consideration. Rates change; the latest rates for a given area and type and age of building are available online from CEA.
If there were a major earthquake, much of the payments to homeowners would come from reinsurance that CEA has purchased. A better understanding of earthquake risk has led to two rate reductions; rates are now 15 percent lower than they were when CEA went into operation in One factor affecting rates was a decision by the Internal Revenue Service that the CEA is a nonprofit organization so that premiums can accumulate without being taxed as profit in the year they are collected.
In September , the CEA began an earthquake mitigation program in eight Bay Area counties called State Assistance For Earthquake Retrofitting SAFER , which includes low-cost inspections and assessments of older homes by structural engineers and low-interest loans to pay for seismic retrofits. It has been more than two decades since the last major urban earthquake in California, and there will be changes after the next inevitable earthquake.
For an example of how an earthquake changed an earthquake-prone region, we turn to New Zealand. New Zealand, like the Pacific Northwest, is a land of great natural beauty in which the spectacular mountains and volcanoes are related to natural hazards, especially earthquakes and volcanic eruptions.
Written records have been kept for less than two hundred years, but during this period, New Zealand suffered damaging earthquakes in , , , , and The country was thinly populated during most of the historical period, and losses, although locally severe, did not threaten the economy of the nation.
In June and August , the capital city of Wellington and the nearby Wairarapa Valley were struck by earthquakes, the largest of magnitude 7. It was the darkest period of World War II, with the war being waged in Pacific islands not far away to the north. Because of the war, there was little money for reconstruction after the earthquakes, and two years later, much of the rubble in the Wairarapa Valley had not even been cleared. Something had to be done. In , while the war still raged to the north, Parliament passed the Earthquake and War Damage Act, and in January , the government began collecting a surcharge from all holders of fire insurance policies.
The Earthquake and War Damage Commission was established to collect the premiums and accumulate a fund to pay out damage claims from war or earthquakes. Later, coverage against tsunamis, volcanic eruptions, and landslides was added. In , Parliament changed the commission from a government department with a state insurance commissioner to a corporation responsible both for its own fund, and for paying a fee for a government guarantee to cover its losses in case a great natural disaster exhausted the fund.
In , Parliament changed the name of the administering agency to the Earthquake Commission. Under the new law, the insurance automatically covers all residential properties that are insured against fire. Since , only residential property has been covered, and every property is rated the same, regardless of ground conditions or proximity to an active fault. The arrangement worked well after , in large part because New Zealand did not suffered a disastrous earthquake in an urban area after the commission was established.
The damages paid out as a result of the Edgecumbe Earthquake M 6. The sharp increase in losses, even after earthquakes of moderate size in rural areas, was an indication that the past would not be the key to the future, especially after a disastrous urban earthquake. The system was put to the test in September, , when an earthquake of magnitude 7. A later earthquake was of magnitude 6. Payout for these losses came from several sources: Because of reinsurance, money actually flowed into the country after the earthquake to pay claims.
This is in the face of other earthquake threats from a subduction zone and from a strike-slip fault that extends through the capital city of Wellington. Because of its financial commitment to earthquake recovery, the Earthquake Commission supports earthquake research.
Losses included not only damage to structures but damage to contents and loss of data. Twenty-one percent of businesses had earthquake insurance, but most of their direct losses were less than their deductible, typically 10 percent of the value of the building and contents.
Most small businesses repaired their damage without insurance payments. Less than one-third of Washington homeowners have earthquake insurance. Immediately after the earthquake, insurance companies placed a moratorium of thirty days on writing new policies. The principal reason was to guard against people who had suffered damage in the earthquake obtaining an earthquake policy after the fact.
In summary, and in contrast to the Loma Prieta and Northridge earthquakes in California, the insurance industry came through the Nisqually Earthquake in good financial shape, even though the urban area affected was about the same. The reasons for this were 1 Nisqually was a deep earthquake, and shaking intensities were lower, and 2 the risk exposure was less than it would have been in urban California; fewer people had earthquake insurance.
United Policyholders, founded in , is a c 3 nonprofit insurance consumer education organization with headquarters in San Francisco. For further information, go to www. The most important thing you can do is before the earthquake: List everything you own, room by room, showing the number of items, their description, age, and cost of replacement. Keep all bills and receipts. Keep your inventory and supporting documents someplace other than your house, such as a safe deposit box.
The adjuster is there to work with the claimant in establishing the claim, but it is so much easier when these documents have been kept updated and stored in a separate location from the residence. After the earthquake, tell your agent that you have damage and are submitting a claim. Do this even if you are not sure you have an earthquake policy; some losses might still be covered.
Categories include dwelling, contents, loss of use or additional living expenses , other structures, etc. Annual inflation factors increase your limits. You might need advice from an independent professional. If your policy and declarations page were destroyed in the earthquake, contact your insurance agent in writing for a duplicate copy.
Documenting a major loss requires comparing cost estimates from at least two or three reputable contractors, including the one you intend to hire for the actual repairs. Contractors might suggest various repair methods, and if your home or foundation is seriously damaged, you should consult a structural engineer. Keep a diary and record the name and phone number of each person you talk to.
After the earthquake, take photos and keep all receipts. For compensation of additional living expenses or loss of use, keep all receipts for meals, lodging, and purchases from the time of the earthquake until your house is rebuilt. For additional information, contact United Policyholders at info unitedpolicyholders.
Even if your damage was from an earthquake, your coverage might be from other policies. For example, a fire in your home might be covered by fire insurance. Tsunami damage might be covered by flood insurance.
On the other hand, landslides are commonly not covered by any type of insurance, whether earthquake-related or not. Earthquake insurance is a high-stakes game involving insurance companies, policyholders, and in some cases, governments. Because earthquakes are so rare at a given location in a human time frame, at least , consumers tend to underestimate the need for catastrophic coverage. A Tacoma homeowner was quoted in Business Insurance as saying: The more I look at this, the more it seems that my chances of having a covered loss are about zero.
The demand for earthquake insurance shoots up after a catastrophic earthquake at the same time the willingness and capacity of insurance companies to offer such insurance sharply decreases. Insurance is, after all, a business, and for the business to succeed, it must make money.
Insurance companies might underestimate the premiums they should charge in a region like the Pacific Northwest, where a catastrophic earthquake a subduction-zone or Seattle Fault earthquake rather than a Nisqually Earthquake has not occurred in nearly two hundred years of recordkeeping.
But premiums might be priced too high to attract customers in places that have recently suffered major losses, such as the San Fernando Valley or the San Francisco Bay Area. Indeed, the entire state of California might be in this fix. The CEA offers a policy with reduced coverage and higher premiums, which causes many people to drop their earthquake insurance altogether. Yet many underwriters in the insurance industry are still not convinced that the reduced policy is cost based.
The quality of construction, particularly measures taken against earthquake shaking, will have an increasing impact on premium costs. This includes discouraging developers from building in areas at risk from earthquakes and other natural disasters.
If a project is awarded an IBHS Seal of Approval, it might be eligible for hazard reduction benefits, including lower premiums. Recently, the legislatures of Oregon and Washington have funded resilience studies to estimate what it would take to reduce the huge risk faced from a subduction-zone earthquake. Much of the analysis concerns hospitals, businesses, command centers, and lifelines, including water lines, fiber-optic cables, and bridges.
The resilience survey for Oregon examined all major bridges and concluded that many of these bridges are obsolete and would be likely to fail in a subduction-zone earthquake. Despite this evidence, the legislature failed to pass a transportation bill that would have begun to address this problem.
California has already done similar studies, including its part of the Cascadia Subduction Zone. These results have been presented to the respective legislatures, but state governments have yet to commit sufficient resources to significantly reduce the risk.
Were they to do so, the risk exposure to insurance companies would change dramatically. The federal government still has not determined what its role should be, and the government responses to Hurricanes Katrina and Sandy are not encouraging.
What should the general taxpayer be required to contribute? Aid in reconstruction rather than low-interest loans? Should earthquake insurance be mandatory for properties in which the mortgage is federally guaranteed?
Should it be subsidized by the government, particularly for low-income families who are most likely to live in seismically dangerous housing but cannot afford the premiums if they are truly cost based?
The unattractiveness of the CEA mini-policy is causing many Californians to drop all earthquake coverage, which raises a new problem for the finance industry. Thousands of uninsured homeowners might simply walk away from their mortgages and declare bankruptcy if their uninsured homes are destroyed by an earthquake. Problems such as these tend to be ignored by the public and by government except in the time immediately following an earthquake.
There is a narrow time window teachable moment for the adoption of mitigation measures and the consideration of ways to deal with catastrophic losses, including earthquake insurance. Authorized by their legislatures, both Oregon and Washington have designed resilience plans, but the price of resilience is steep, and thus far the governing bodies have not come up with the money to become resilient. The taxpayer appears to be willing to go along with this lack of action. California Department of Conservation.
California Department of Conservation Special Publication Cascadia Subduction Zone Earthquakes: Insurance Service Office, Inc. Threats from without, weakness within. Boulder, CO, Westview Press. What are the principles of insuring natural disasters?
Earthquake Engineering Research Institute publication. Washington State Seismic Safety Committee, Emergency Management Council, , Resilient Washington State, a framework for minimizing loss and improving statewide recovery after an earthquake: Final report and recommendations: Division of Geology and earth Resources, Information Circular , 38 p. Betting Against Earthquakes by Robert S. Some Philosophical Issues Should you buy earthquake insurance for your house?
A Brief Primer on Insurance Insurance is our social and economic way of spreading the losses of a few across the greater population. Catastrophe Insurance Insurance against natural catastrophes is much more complex and much less understood, and a large company might employ engineers, geologists, and seismologists to help it calculate the odds.
Government Intervention State governments have already intervened in the insurance business, thanks to the McCarran Ferguson Act of California In California, earthquake insurance was offered even before the San Francisco Earthquake, with major problems paying claims from that disaster, as pointed out above.
New Zealand New Zealand, like the Pacific Northwest, is a land of great natural beauty in which the spectacular mountains and volcanoes are related to natural hazards, especially earthquakes and volcanic eruptions. What to Do if You Have an Earthquake Claim United Policyholders, founded in , is a c 3 nonprofit insurance consumer education organization with headquarters in San Francisco.
Summary Statement and Questions for the Future Earthquake insurance is a high-stakes game involving insurance companies, policyholders, and in some cases, governments. The question about earthquake damage is: He says of the live trading room: My readers could not see what I saw during the day.
Trading requires you to be fluid. Robert has been an Affiliate Member of the Market Technicians Association since , an organization dedicated to education, professional standards and ethics in Technical Analysis. Rob is known for trading his REAL live account, right before your eyes. He leaves nothing to the imagination and does NOT use simulators. As many trading educator and professions rely on simulated accounts and past history to teach, this is not where you get the most value.
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