EARTHQUAKE RISKS

Dominion, Volume 21, Issue 190, 14 May 1928, Page 10

EARTHQUAKE RISKS

WHY INSURANCE COMPANIES DISCOURAGE THEM

DAMAGE NOT CALCULABLE The council of the Wellington Chamber of Commerce in December last, in discussing the question of prevention ot fire waste, touched upon*the subject ot insurance against. risks of loss through earthquake, pointing out to the Underwriters’ Association that comparatively few business men took out this class ot insurance for the reason that the rates charged were felt to be too high, and. it reduced, would appeal more widely. Mr. P. 11. Upton, of the Underwriters Association, in his reply, stated that insurance companies desired to avoid this risk, because to cover the risk of loss by earthquake was. not insurance within the ordinary meaning of that term. Insurance was an indemnification of losses which might happen. Its demand was universal. Its basis was a wide distribution of risks. Experiences taught the premium value of risks and means by which liability for losses might be distributed so that a claim might be met without difficulty. Daninge by earthquake was inevitable in certain regions. It was only in those regions that compensation for damage was sought. No estimate was possible of the extent of damage that might result when the disturbance occurred. , The popular view of insurance companies’ accounts was to regard as profit any surplus of income remaining after paying losses and expenses and providing for unexpired policies. Insurance executives knew that provision must’bc made for,losses of exceptional magnitude on ordinary risks, and reserves were accumulated. These reserves enabled abnormal losses to be met without impairment of security. It would not be right that reserves . thus accumulated for the better protection of ordinary risks should be jeopardised by any general cover against earthquake loss. Satisfies No Guide. “Statistics,” continued Mr. Upton, “furnish no guide. 1 f they teach anything it is that earthquakes have a period, or habit, as Professor Bailey Wil; lis better terms it. By ‘earthquake habit’ is meant a succession of shocks characteristic of a given district, taking into account frequency, intensity and extent of area affected. Knowledge of the earthquake habit of any district would enable the value of the ‘risk’ in that district to be estimated. What would be the result? When there was no danger, the property owner would not seek protection; when the danger point began to draw near no one would provide protection. Inquiry for earthquake ‘insurance’ follows the occurrence of an earthquake, and inquirers are then prepared to pay substantial rates; yet it is at that time that the danger is least. It is towards the end of a quiescent period that danger increases, ,jet inquiries then in ordinary circumstances are rare. The present inquiry seems to have been prompted not by considerations of danger but possibility of obtaining this protection cheaply, of having it ‘thrown in,’ so to speak, at nominal cost. Endeavour of Companies.

“The constant endeavour of insurance companies is to assess hazards and charge premiums according to experience, distributing the wastage at the least cost, while obtaining a moderate percentage for their services. The risks insured against are more or less constant and continuity of cover is certain. For the reasons outlined above earthquake hazards has no relationship with these conditions. The danger may vary enormously, it cannot be assessed, rates commersuratc with the risks year by year might conceivably range from a nominal charge to a prohibitive charge, and continuity of cover could not be. counted upon. Ordinary insurance is against misadventure, and is available year by year. Earthquake shock, on the other hand, is inevitable, and in regions where destructive effects are likely, ‘insurance’ might not be available when most needed. It follows that any form of earthquake insurance for short terms is unsound. Such insurance should be of the nature of life insurance—or assurance. Premiums paid year by year should- be accumulated so that the requisite funds would be available when the inevitable should happen. While this is but a suggestion in the consideration of this class of insurance, before any such scheme could be put into operation, legislative authority would be needed. Reasons for Exclusion. In the first place it is interesting to note that whereas this inquiry . arose from a discussion upon prevention of fire waste, the question asked is in regard not to minimising the loss through, earthquake but to the cost of providing compensation for such loss. Seeking compensation for loss through earthquake at once raises the question, who should provide such compensation? Were the loss confined to damage by fire it would be natural perhaps to turn for cover to companies whose business is to insure against loss by. fire. But insurance companies outside of America exclude from their policies liability for damage caused by tire the result of earthquake. This exclusion is not fertile purpose of getting an additional premium from those desirous of having this risk included.. There are several reasons for the exclusion. Ordinary fire insurance is universal, degrees of ordinary hazards are calculable, maximum liability within defined areas may be limited. Earthquake risk is regional, its hazard cannot be calculated, its extent is unknown, and its losses are concentrated. In short, the fundamental principles' upon which ordinary fire insurance is based, known hazards, distribution of risks, and limitation of liability, are wholly foreign from risks of earthquake. • “There is even greater objection to fire insurance companies being called upon to provide indemnity for loss directly caused by earthquake. In America the extent to which fire insurance companies, driven to cover this risk to protect their fire business against attack by competitors using earthquake cover as a lever, were being committed caused such great concern that a special meeting of underwriters was held in San Francisco last year to review the position. It. was with reluctance decided not to refuse to coker on economic grounds but to raise rates sufficiently to deter applications, and if such higher rates did not have the desired effect, again to raise them.