Risa I. Palm - Earthquake Insurance in California: Environmental Policy and Individual Decision-Making

Environmental Policy and Individual Decision-Making

Risa I. Palm, Michael E. Hodgson, R. Denise Blanchard, and Donald I. Lyons

First published 1990 by Westview Press, Inc.

Published 2018 by Routledge
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Library of Congress Cataloging-in-Publication Data
Palm, Risa I.
Earthquake insurance in California: environmental policy and
individual decision-making / by Risa I. Palm and Michael E. Hodgson.
p. cm.
Includes bibliographical refernces and index.
ISBN 0-8133-8119-0
1. Insurance, EarthquakeCalifornia. 2. Insurance, Earthquake
CaliforniaPurchasing. I. Hodgson, Michael E. II. Title.
HG9981.35.C2P35 1990
368.1'22dc20 90-43601
CIP

ISBN 13: 978-0-367-01593-0 (hbk)

The 1989 Loma Prieta earthquake in the San Francisco Bay region prompted the popular press to remind Americans of the need to attend to natural hazards. Since for most middle income families home equity is the major repository of family wealth, the press has provided advice on how to protect the value of property. For example, the February 1990 issue of Money magazine featured a 15page article on natural disasters (Hurricane Hugo and the Loma Prieta earthquake), with advice on how to avoid major financial losses. For California residents, the magazine's advice was clear: "Most Californians, of course, would be well advised to carry quake insurance if they can afford it" (Seixas and Willis, 1990, p. 66).

With two major and costly natural disasters occurring in the United States within two months during fall 1989--Hurricane Hugo and the Loma Prieta earthquake--vulnerability to natural hazards has become more significant in popular consciousness. While Congress debates how to reduce vulnerability to such natural hazards, individual homeowners are concerned about recovering losses and reestablishing their lives. A major issue in all discussions is hazard insurance--how to provide it, whether or not to buy it, and how effective it is.

This book focuses on the topic of earthquake insurance for homeowners and their attitudes to the earthquake risk. It is based on a survey of California residents completed just a few months before the Loma Prieta earthquake. reviews the setting of earthquake hazards in the national context. The vulnerability of various regions of the United States to damage from earthquakes is described. Next, estimated losses of life and property from expected earthquakes along portions of the San Andreas fault system are outlined, as well as the potential national economic reverberations of a major earthquake in an urban area of California. This chapter also notes several mitigation measures that residents could adopt and concludes with a discussion of earthquake insurance.

discusses the decision to purchase earthquake insurance from the perspective of the individual household. Here, studies of risk communication and bias in decision-making under conditions of uncertainty are reviewed, as well as the implications of these studies for the current research on earthquake insurance purchase. This review of consumer behavior is placed in the framework of the political economy and cultural context of California. This chapter describes California legislation on earthquake insurance, attitudes of individuals toward the earthquake hazard, and current distrust of California residents toward the insurance industry as a whole.

summarizes the most significant of the empirical findings and their implications for public policy.

Risa I. Palm
Michael E. Hodgson
R. Denise Blanchard
Donald I. Lyons

This monograph is based upon work supported by the National Science Foundation under Grants No. BCS-8802896 and BCS-8943381. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation. We would like to thank the members of our advisory committee who gave graciously of their time and advice. Members of this committee were: Anne Butler, David Brookshire, James Brown, Sheldon Davidow, Harold T. Duryee, Walter Hayes, E.V. Leyendecker, Howard Kunreuther, Eugene LeComte, Edward Levy, Joanne Nigg, Sherry Oaks, and Richard Roth. In addition, we wish to thank William DesVouges for his suggestions on the sampling frame and survey design, as well as the suggestion to use the telephone reminder to increase response rate. Howard Kunreuther was very helpful and made many suggestions on both the questionnaire and survey methods. Jack Evernden graciously lent us the original shaking intensity maps on which the risk analysis for San Bernardino and Los Angeles Counties was based. Richard Roth has been an important contributor to this project, has served enthusiastically on the advisory committee, and was instrumental in making contacts with California insurance companies that permitted us to do the "validity check" on insurance subscription. Eugene LeComte helped us in getting the cooperation of one of the very large national insurance companies and has kept us current with the progress of federal legislation. Bill Riebsame provided us with advice and encouragement throughout the project. David Morton was very helpful in identifying fugitive literature related to the project. Regina Hanson was the secretary to the project and provided an usual high quality of support in all phases of project development, execution and evaluation. Rachel Jarvis helped prepare the manuscript. Pat Peterson provided us an unusual quality of editorial support, advising us on publication and also copy-editing the manuscript. Wendy Haubert, a research assistant on the project, designed and produced maps for this monograph. Holly Strand, a graduate research assistant, helped in the survey. Wayne Bannister of the County of Los Angeles was very supportive of our research and provided us with invaluable data. Nora Bryan of GeoBased Systems was also extremely helpful in procuring fugitive data. We also thank Alex Goetz at the Center for the Study of Earth from Space for the use of his laboratory throughout the project. As always, we wish to thank Bill Anderson of the National Science Foundation for his continuing intellectual guidance, support, and very helpful advice.

R.P.
M.H.
R.D.B.
D.L.

In order to set the issue of earthquake insurance in a broader geographical context, let us first review the distribution of earthquake risk in the United States. We will then return to earthquake hazards in California and the way in which earthquake insurance could act as a deterrent to some of the most devastating financial impacts of earthquake hazards.