California Earthquake – are we sleepwalking to disaster?

Did you know that 90% of Californian Homeowners don’t buy Earthquake Insurance? Did you know that most Californians live within 30 miles of an Earthquake fault line? And did you know that if California was an Independent Country that it would have the world’s 5th largest economy?

Some interesting facts but what do these mean? They mean that whilst Californians have massive, uninsured exposures to the Peril of Earthquake that there is the financial capacity within California to solve the exposures that they face. But here’s the problem: if you don’t buy Insurance for Earthquake and you make no other provision then when the earthquake hits, and it will hit, then the impact upon California and individual Californians will be catastrophic.

Doing nothing about your Earthquake exposures is not a strategy.

Now look at the consequences of doing nothing. Let’s take it from an individual’s perspective. You have a Home at an average value of $600,000 and you have a loan of $400,000 in order to buy it. You have no Earthquake Insurance. The Earthquake strikes and your home is destroyed you have two basic options. You try to obtain a loan from a Bank in order to re-build your home. Let us say that the re-building cost of your home is $400,000 and you have no savings, so you need to borrow $400,000 to re-build a home that has a market value of $600,000 and already has a loan on it of $400,000. What do you think the chances of the Bank lending the money would be? As close to zero as makes no difference. The other option is that the Homeowner hands the keys of the destroyed home back to the Bank wishes them well and informs them that he is no longer going to service the Mortgage. This might sound like an attractive option – but it isn’t. The repercussions of this latter course of action would result in the melt down of the Individual’s credit scoring. It would effectively mean that the rest of one’s life one would have the Albatross of a defaulted mortgage around one’s neck.

Now look at the market situation. Let us say that the above figures are multiplied over 50,000 affected homes. This would potentially result in a financial loss of $20,000,000,000 in defaulted mortgages. The entire California Housing market would be affected and Banks would be extremely careful in offering loans in future. Set against this it makes our first scenario above (of borrowing yet more money) even more extremely improbable. So in the above (small scenario) we have 50,000 families whose Credit Scores have been trashed and where the Banking market has been severely impacted.

Still think that doing nothing is an option?

But the perception is still that Earthquake Insurance is an expensive option. There is no doubt about it, living in California is expensive. So many Californians feel that spending the high premiums to purchase Earthquake Insurance is just one more expense that they can do without paying. So what is the alternative?
Until now there have only been two options, the ones outlined above: buy the Insurance or do nothing (it’s rather grandly called ‘self insurance’ but we all know what that effectively means, it means doing nothing). But now there is a third Option it’s called a Guarantee Fund. Hartwell Insurance has put together the facility to enable ordinary Californians to crowd fund their Earthquake exposures. It’s not Insurance and it’s not doing nothing. It’s crowd funding via the payment of reasonable contributions into an earthquake Guarantee Fund which shares the exposures of individual Californians across the whole of the State. Employing the traditional principles of sharing exposures and payments into a common fund we can address the exposures represented by Earthquake in a meaningful way.

The concept is simplicity in itself: by creating a common guarantee fund we can do something meaningful to address the exposures faced by ordinary Californians. Hartwell uses its position as a rated and regulated company to administer the fund and to ensure that payments collected are kept in a common fund and are spent only in accordance with the terms of the Guarantee Fund. The Fund is open to all Californian Homeowners. There is no Underwriting, there are no complicated questions, there are no deductibles. Payments come from the Fund and each individual member of the Fund is entitled to claim for Earthquake damage to their homes up to the value of the re-building cost of their home or the amount left in the Guarantee Fund. The Homeowner becomes a Member of the Fund and their annual payments maintain that membership and increases the total value in the Fund. Once a member the Fund undertakes that no individual member’s contributions will be increased. If the Fund is at any stage wound up, then all of the contributions left in the Fund will be distributed back to the Members (Homeowners). There are approximately 13 million homeowners in California and if each and every one of them joined the Hartwell Guarantee Fund then at the basic contribution rate of $250 per annum then this would mean that the Fund would grow by $3.25 billion per annum. Just think about that. Californians could crowd fund their own exposures to the tune of $3.25 billion per annum at extremely reasonable rates in order to address their Earthquake exposures. Now that’s better than doing nothing isn’t it and if the Fund is ever wound up for any reason then their net contributions would be returned to them. Remember we said that if it was an independent country that California would be the 5th largest economy in the world? Well in this short blog I hope we’ve painted two very clear scenarios – by doing nothing about Earthquake Californians are storing up serious issue for themselves in the future. But if they do something – and the Hartwell Guarantee Fund is certainly a very attractive option – then the enormous power of the Californian economy can be made to work for Californians. That’s why, when we talk about the Hartwell Earthquake Guarantee Fund for Homeowners, we say that this is a Guarantee Fund for the people by the people. The power to address the earthquake problem lies within the power of individual Californians. Hartwell is providing the structure for Californians to help themselves. We are bringing Earthquake solutions to the people. All that Californian’s have to do is to choose between Insurance or the Hartwell Guarantee Fund but doing nothing is now no longer the only alternative option.

Californians together can beat the exposures of Earthquake; we can do it.