Tsunamis and Earthquakes: Is Federal Disaster Insurance in Our Future?

CRS Report for Congress
Tsunamis and Earthquakes:
Is Federal Disaster Insurance in Our Future?
Updated November 7, 2006
Rawle O. King
Analyst in Industry Economics
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

Tsunamis and Earthquakes:
Is Federal Disaster Insurance in Our Future?
Recent earthquakes and tsunamis in 2004 and 2006 have led some Members of
Congress to question whether the federal government should be involved in
providing disaster insurance against mega-catastrophes. On October 15, 2006, a
magnitude 6.7 earthquake struck the Hawaiian Island of Oahu, causing widespread
disruption in electrical power and communications, landslides, sinkholes, and
damaged buildings and roads. There were no fatalities. According to the U.S.
Geological Survey (USGS), this recent earthquake was the strongest to strike Hawaii
since another magnitude 6.7 struck in 1983.
Aftershocks were still being felt as late as March 2005 following the December
26, 2004, earthquake that struck six miles below the surface of the Indian Ocean on
the northern tip of the Indonesian island of Sumatra. The 2004 earthquake spawned
a massive tsunami that smashed the coastlines of 12 countries in South Asia and East
Africa, resulting in over 280,000 people dead or missing and significant economic
and non-economic damages. Insured losses were relatively low compared to the tens
of billions of dollars of economic and non-economic losses because few residential
and commercial buildings were insured.
Although tsunamis pose some risk to coastal communities around the world,
they occur infrequently in the United States. The communities at risk are along the
U.S. West Coast, Alaska, and the Pacific Region (Hawaii, America Samoa, Guam,
the Republic of Palau, the Federated States of Micronesia, and the Republic of
Marshall Islands). In contrast, most Americans live in areas considered “seismically
active” — although the degree of earthquake risk varies greatly — and the areas with
the potential for the most seismic activities are the Pacific coast, the Mississippi
valley around New Madrid in Missouri, Alaska, Utah, South Carolina, and the New
England region centered around Boston.
In the aftermath of the 2004 Indonesian tsunami and America’s continued
vulnerability to seismic hazards, including the 2006 Hawaiian earthquake, Members
of Congress might elect to focus attention on the vulnerability of the U.S. coastlines
to offshore earthquakes and tsunamis, and the potential effects of a major earthquake
on both the homeowners’ insurance market and the overall U.S. economy. Congress
has debated the vulnerability of America’s coastlines to earthquake and tsunami
hazard risks, leading to legislative action following the April 1992 California
earthquake/tsunami and the 1964 earthquake/tsunami at Alaska’s Prince William
Sound. Although a federal flood insurance program was eventually enacted in 1968
in response to the 1964 earthquake, it took Congress another decade to address the
nation’s exposure to earthquake hazards with the enactment of the Earthquake
Hazard Reduction Act of 1977. Congress did not create an explicit federal
earthquake insurance program, albeit the National Tsunami Hazard Mitigation
Program was established in 1992. Some insurance and disaster policy experts
suggest the time has come to implement a federal insurance or reinsurance program
for earthquakes and other seismic risks. Conversely, other experts question the need
for such a program. This report will be updated as events warrant.

In troduction ......................................................1
Recent Developments..............................................1
The 2006 Hawaiian Earthquake...................................1
Lessons Learned from Hurricane Katrina...........................3
The 2004/2005 Indian Ocean Tsunami.............................4
Earthquakes, Tsunamis, and Early Warning Systems......................7
National Tsunami Hazard Mitigation Program......................10
NOAA’s Tsunami Ready Program...............................11
The Administration’s Plan for Improving Tsunami Detection
and Warning Systems......................................11
Insurance and Catastrophe Risk Management...........................12
Catastrophic and Non-Catastrophic Insurance Risks..................12
The Role of Reinsurance.......................................14
California Earthquake Authority.................................15
The Role of Federal Government.................................16
Past Congressional Efforts to Create a Federal Disaster Insurance Program....18

106th and 107th Congresses..................................20th

108 Congress...........................................21
109th Congress...........................................21
Policy Issues.....................................................22
Concluding Observations...........................................22
List of Tables
Table 1. Ten Largest-Magnitude Earthquakes of the Past Century...........5
Table 2. Most Damaging Tsunamis Worldwide, by Mortality...............6

Tsunamis and Earthquakes:
Is Federal Disaster Insurance
in Our Future?
According to A.M. Best Company’s 2006 Annual Earthquake Study, the U.S.
property and casualty insurance industry is “long overdue for heavy losses from a
massive earthquake ... it is only a matter of time.”1 In the aftermath of the 2004
Indonesian tsunami and America’s continued vulnerability to seismic hazards, as
evidenced by the October 15, 2006, Hawaiian earthquake, Members of the 110th
Congress might elect to focus attention on the vulnerability of the U.S. coastlines to
offshore earthquakes and tsunamis, and the potential effects of a major earthquake
on both the homeowners’ insurance market and the overall U.S. economy.
This report examines the U.S. exposure to tsunamis and earthquakes and the
early warning systems that are currently in place to detect these risks. It also
examines both the unique nature of catastrophic risk and the challenges that private
insurers and reinsurers face in insuring such risks. Finally, the report summarizes the
historical efforts to implement a federal program to insure and mitigate risks
associated with large-scale natural disasters.
Recent Developments
The 2006 Hawaiian Earthquake
On October 15, 2006, a magnitude 6.7 earthquake, and related aftershocks, hit
the Hawaiian Island of Oahu, causing widespread disruption in electrical power and
communications, landslides, sinkholes, and destruction to buildings, schools, and
roads. Some 1,130 houses on the island were damaged and 29 more were
uninhabitable.2 Fears of a tsunami following the earthquake did not materialize, and
there were no fatalities or serious injuries. President George W. Bush issued a major
disaster declaration under the Robert T. Stafford Disaster Relief and Emergency

1 A.M. Best Co., “2006 Annual Earthquake Study: $100 Billion of Insured Loss in 40
Seconds,” October 16, 2006, located at [http://www.insurancenewsnet.com/
2 Mike Leidemann, “Cost of Hawaii Quake Damage Soaring”, USA Today, October 23,
2006, p. 3A

Assistance Act for the state of Hawaii. Accordingly, Federal relief and recovery
assistance has been provided to the affected area.
According to the U.S. Geological Survey (USGS), the earthquake was the most
powerful to hit Hawaii since 1983 when a magnitude 6.7 event damaged 35
commercial buildings, along with 317 houses that suffered minor damage and 39
houses that incurred major damages.3 Prior to the 1983 earthquake, the strongest
earthquake to strike Hawaii in more than a century (since April 2, 1868) was a
magnitude 7.2 earthquake in 1975 that injured several and caused an estimated $4.1
billion in property damages.4 By comparison, the 1868 earthquake caused 77 deaths
(tsunami, 46; landslide, 31) but limited property damages.5
Hawaii is vulnerable to significant losses from not only earthquakes and
volcanic eruptions, but also hurricanes. Given that the probable maximum loss
(PML) for downtown Honolulu — the center of business activity in Hawaii — is
approximately $50 billion, Hawaii does face significant catastrophe exposure to
large-scale natural disasters. But to the extent there has been an insurance crisis in
Hawaii in recent decades it has been with respect to the availability and affordability
of insurance against hurricanes, particularly after Hurricane Iniki struck in 1992.
Residential insurance coverage against earthquake risk has been widely available at
reasonable rates from private insurers operating in Hawaii.
The full extent of economic losses from the 2006 earthquake is not known, but
early reports suggest that damage to homes, businesses, and infrastructure will be
modest, perhaps in the $100-150 million dollar range, with insured property losses
under $25 million, the threshold for being considered an industry-defined
catastrophe.6 The insurance does not include public buildings and infrastructure in
its estimates of total insured losses. This earthquake is not considered a catastrophe
because of the low dollar value of total insured losses. By way of comparison, loss
estimates from the 2006 Hawaii earthquake are modest compared to the most costly
earthquake in the United States — the magnitude 6.7 Northridge earthquake that
struck Los Angeles in 1994 and caused an estimated $20 billion in total property
damage, including $12.5 billion insured losses.
There are three possible reasons for the relatively low level of insured losses
from the 2006 Hawaiian earthquake:
!(1) The insurance penetration is relatively low — Hawaii ranks 33rd
in direct premium written for earthquake coverage, with $4.4 million

3 U.S. Geological Survey, “Historic Earthquakes: Island of Hawaii”, located at
[http://earthquake.usgs .gov/regional/states/ events/1983_11_16.php].
4 U.S. Geological Survey, “Historic Earthquakes: Kalapana, Hawaii”, located at
[http://earthquake.usgs .gov/regional/states/ events/1975_11_29.php].
5 U.S. Geological Survey, “Historic Earthquakes: Ka’u District, Island of Hawaii”, located
at [http://earthquake.usgs.gov/regional/states/events/1868_04_03.php].
6 Business Insurance, “Insurers Don’t See Big Losses From Quake That Hit Hawaii,”
October 23, 2006, p. 4

written, according to A.M. Best Co., an insurance rating company
based in New Jersey. This earthquake coverage figure could be low
because property owners could also purchase coverage through
excess and surplus (E&S) line brokers, and the actual E&S premium
volume is unknown by regulators at this time.
!(2) The relatively high deductibles generally associated with
earthquake insurance coverage means that property owners typically
will have to pay to repair the minor property damages. If the insured
pay, then the insurers do not have to.
!(3) Hawaii’s seismic risks are well known and the state has prepared
for events of this magnitude by adopting building codes appropriate
for earthquake-prone areas.
The insured losses from the 2006 Hawaiian earthquake could exceed the early
estimated losses of $100-$150 million when capital losses are known. Capital losses
include such items as repairs to or replacement of buildings, contents, and inventory;
and loss of income, including business interruption, rental income, and wage losses.
The full extent of “subtle damage” to interior structures, foundations, walls, ceilings,
and roofs of houses and businesses in the impacted areas will be known only after
inspection by engineers.7
A public policy response to the 2006 Hawaii earthquake will likely be debated
in the broader context of increasing demand for insurance (and reinsurance)
following the 2004 and 2005 catastrophic hurricane seasons, along with calls for the
federal government to create a financial backstop in response to the growing scarcity
of catastrophic reinsurance in disaster-prone areas. Although earthquake insurance
coverage was readily available in Hawaii prior to the recent event, most insurance
analysts believe this situation will change, as insurers revise their expectations of
future losses. After a catastrophe such as the 2006 Hawaiian earthquake, the cost of
reinsurance could rise due to increased demand for coverage. This forces the primary
insurers to pass their higher costs in the form of higher premium rates on to their
customers. As rates go up, access to coverage oftentimes becomes more difficult or
impossible to obtain at any price.
Lessons Learned from Hurricane Katrina
The relatively low percentage of homeowners in the Gulf Coast who had
federally required flood insurance when Hurricane Katrina struck in August 2005
demonstrated to policymakers the need to strengthen mandatory insurance purchase
requirements and take steps to get residents and business owners in hazard-prone
areas to protect their property against natural disasters. Some industry observers have
called Katrina the “U.S. Gulf Coast Tsunami,” reinforcing the realization that the
United States has some exposure to earthquake and tsunami hazard risks. In

7 Janis L. Magin and Maria Newman, “A Strong Earthquake Rattles Hawaii: Reports of
Injuries and Power Failures Throughout the Islands,” The New York Times, Oct. 16, 2006,
p. A12.

testimony before the House Science Committee on January 26, 2005, the director of
the U.S. Geological Survey told Congress that there is a 10%-14% probability that
the U.S. (Oregon) coast will be hit within the next 50 years by a tsunami comparable
in size to the South Asian earthquake and tsunami.8 Charles S. Groat’s testimony
reinforced the perception that although the United States is not as vulnerable to
tsunamis as other regions of the world, west coast states face some tsunami hazard
risk. In addition, the National Oceanic and Atmospheric Administration’s (NOAA)
national historical tsunami database for the 105-year period from 1900 to 2004
indicates that 9% of all tsunamis were generated off Alaska and the west coast of
Canada and the United States, and 3% were generated near Hawaii.9
The 2004/2005 Indian Ocean Tsunami
On March 28, 2005, a magnitude 8.5 earthquake struck near the same place as
the December 26, 2004, Indian Ocean tsunami some six miles below the surface of
the Indian Ocean on the northern tip of the Indonesian island of Sumatra.10 The
Indonesian earthquake/tsunami is one of the worst natural disasters in human history
not only because of the number of casualties, but also because of the combination of
the unprecedented geographical scope of the devastation and degree of economic
loss. The 2004 earthquake spawned a massive tsunami that smashed the coastlines
of 12 countries in South Asia and East Africa, resulting in over 280,000 people dead
or missing and significant economic and non-economic damages.11 Insured losses
were relatively low compared to the tens of billions of dollars of economic and non-
economic losses because few residential and commercial buildings were insured.
The magnitude of the 2004 Indonesian tsunami in terms of deaths and economic
damages has prompted government officials from around the world to call for greater
international cooperation on emergency disaster relief planning and assistance, and
the establishment of a tsunami early-warning system in the Indian Ocean similar to
that already functioning in the Pacific Ocean. Even a relatively inexpensive tsunami
detection and warning system in the Indian Ocean that warned people of an imminent
tsunami hazard and the arrival time at selected coastal communities in South Asian
and East African countries would have almost certainly saved tens of thousands of

8 Statement of Charles G. Groat, Director, U.S. Geological Survey before the House Science
Committee, Tsunamis: Is the U.S. Prepared?, hearings, 109th Cong., 1st sess., Jan. 26, 2005.
9 Statement of Vice Admiral Conrad Lautenbacher, Jr., Under Secretary of Commerce for
Oceans and Atmosphere and NOAA Administrator, National Oceanic and Atmospheric
Administration, before the Senate Committee on Science, Commerce and Transportation,thst
The Tsunamis Preparedness Act of 2005, hearings, 109 Cong., 1 sess., Feb. 2, 2005, p. 2.
10 The December 2004 earthquake occurred along the North-South fault (also known as the
Sunda Trench), where the Indian plate dives below the Burma plate. It pushed a section of
the Burma plate ocean floor (6 to 9 miles wide and 745 miles long) 100 feet straight up.
This sudden shift triggered the displacement of ocean water that caused the seismic sea
waves. The March 2005 aftershock caused hundreds of deaths, but it did not generate a
tsunami large enough to be damaging.
11 These countries are: Bangladesh, India, Indonesia, Kenya, Malaysia, Myanmar, Maldives,
Seychelles, Somalia, Sri Lanka, Tanzania, and Thailand.

Table 1 shows that the earthquake that caused the Indonesian tsunami of 2004
was the fourth-largest earthquake since 1900 and the largest since the1964 Prince
William Sound, Alaska, earthquake. According to Swiss Re, insured losses from the
tsunami were about $5 billion. This figure does not include the cost of disaster relief12
and rehabilitation, which will likely run into the tens of billions of dollars. The
Insurance Information Institute in New York reported that the U.S. share of insured13
losses is not expected to be significant. The expected ratio of insured to the overall
economic losses can be estimated on the order of 5%-7%, which is consistent with
prior economic loss data in disaster-stricken developing countries, where insured
losses from natural disasters rarely exceed 3%-5% of the total economic loss. Most
of the insured losses from the tsunamis would result from damage to the tourism
industry, including vacation resort properties, personal accident and travel insurance,
as well as claims associated with damage to infrastructure (airports and utilities), port
facilities, and marine-related insurance.14
Table 1. Ten Largest-Magnitude Earthquakes
of the Past Century
DateCountry or PlaceMagnitude
May 22, 1960Chile9.5
March 27, 1964Alaska9.2
November 4, 1952Russia9.0
December 26, 2004Indonesia9.0
January 31, 1906Ecuador8.8
March 9, 1957Alaska8.8
November 6, 1958Kuril Islands8.7
February 4, 1965Alaska8.7
August 15, 1950India8.6
November 11, 1922Argentina8.5
Source: National Earthquake Information Center, United States Geographic Survey,
[http://origin-wcatwc.arh.noaa.gov/tsunamiready/stats.pdf], visited Jan. 30, 2006.

12 For more information, see CRS Report RL32715, Indian Ocean Earthquake and Tsunami:
Humanitarian Assistance and Relief Operations, by Rhoda Margesson.
13 Robert P. Hartwig, Asian Earthquake and Tsunami: An Insurance Perspective, (Insurance
Information Institute: December 30, 2004), available at [http://www.iii.org/media/hottopics/
additional/asianearthquake], visited Jan. 3, 2005.
14 Charles Fleming, “Insurers May Face Limited Exposure from Tsunami,” Wall Street
Journal, Dec. 28, 2004, p. A8.

The reason for the low insurance losses is that the affected countries are
relatively poor, which means that individuals and businesses are less likely to have
insurance. The insurance penetration in the Asian countries affected by the disaster
ranges from less than $1 per capita for Bangladesh to $87 for Malaysia.15 This level
compares to $1,980 per capita spending on non-life insurance in the United States in
2003.16 Table 2 uses tsunami data from the National Oceanic and Atmospheric
Administration to show the most damaging tsunamis worldwide in terms of deaths.
Table 2. Most Damaging Tsunamis Worldwide, by Mortality
Y e ar Location Deaths
2004South Asia, East Africa175,000
1782South China Sea40,000
1883South Java Sea36,500
1707Tokaido-Nankaido, Japan30,000
1896Sanriku, Japan26,360
1868North Chile25,674
1792South West Kyushu Island, Japan15,030
1771Ryuku Trench13,486
1976Moro Gulf, Philippines8,000
1703Tokaido-Kashima, Japan5,233
1605Nankaido, Japan5,000
1611Sanrika, Japan5,000
1746Lima, Peru3,800
1899Banda Sea, Indonesia3,620
1692 J a ma ica 3,000
1854Nankaido, Japan3,000
1933Sanriku, Japan3,000
1674Danda Sea, Indonesia2,243
1998Papua New Guinea2,182
1923Tokaido, Japan2,144
1946Nankaido, Japan1,997
1766Sanriku, Japan1,700
2005Sumatra, Indonesia1,000
1964Alaska, United States119
Source: National Geophysical Data Center, National Oceanic and Atmospheric Administration,
[ http ://o r igin-wcatwc .ar h.no aa.go v/tsuna mir ead y/stats.p d f] .

15 Robert P. Hartwig, Asian Earthquake and Tsunami: An Insurance Perspective (Insurance
Information Institute: December 30, 2004), available at [http://www.iii.org/media/hottopics/
16 Ibid.

Earthquakes, Tsunamis, and Early Warning
Earthquakes and other seismic hazards (e.g., tsunamis, landslides, and volcanic
eruptions) are simultaneously a global phenomenon and a specific threat to the U.S.
economy, its citizens, and the nation’s insurance industry. Most Americans live in
areas considered “seismically active,” although the degree of earthquake and tsunami
risk varies greatly. Each year about 5,000 quakes occur, but only a relatively small
percentage cause injuries or damage to property. The U.S. Geological Survey
estimates that 39 of the 50 states are subject to significant risk of earthquakes and
volcanic eruptions. Potentially damaging earthquakes could occur in many parts of
the United States, including the Pacific coast, the Mississippi valley around New
Madrid in Missouri, Alaska, Utah, South Carolina, and the New England region
around Boston. Scientists predict that we have a 90% chance of a major earthquake
in California occurring in the next 30 years, with damage estimates ranging from $60
to $70 billion. Moreover, earthquakes can also strike in unexpected places. In April
2002, a 5.1 magnitude earthquake struck in the Northeastern United States and part
of Canada. The event was centered on the town of Plattsburg, New York. In 1737
and 1884 New York City was hit by 5.1 magnitude earthquakes.17
Tsunamis occur infrequently in the United States. The communities at risk are
along the U.S. West Coast, Alaska, and the Pacific Region (Hawaii, America Samoa,
Guam, the Republic of Palau, the Federated States of Micronesia, and the Republic
of Marshall Islands).18 According to NOAA, during the last 204 years, 24 tsunamis
have caused damage in the United States.19 Although tsunamis pose a particular risk
to coastal communities on the Pacific coast, historical records indicate that tsunamis
occasionally hit the U.S. northeastern coastal states along the Atlantic Ocean.
Tsunamis caused property damages in Puerto Rico in 1918 and Newfoundland,
Canada in 1922. Scientists are reportedly concerned about the Cumbre Vieja volcano
in Las Palmas (Canary Islands). Some geologists believe that a significant volcano
eruption in this area could send a tsunami into the eastern seaboards of North and
South America.20
Unlike tsunamis that can be predicted using underwater sensors, floating data
buoys, and radar data from orbiting environmental satellites, earthquakes currently
cannot be predicted. Scientists believe that one day earthquakes will be just as

17 “When the Earth Moves,” Reinsurance: Global Risk Analysis, Feb. 2005, p. 14.
18 Tsunamis can also travel upstream in coastal estuaries and rivers, and cause damage
further inland than the immediate coast.
19 For more information on the U.S. exposure to tsunamis, see answers to questions posed
to Admiral Conrad Lautenbaucher, Administrator of NOAA, available at
[http://whitehouse.gov/ ask/ print/20050114.html ].
20 Morgan O’Rourke, “Danger on the Coast: Coastal Catastrophe Risk,” Risk Management
Magazine, Mar. 2005, p. 32.

predictable as hurricanes, tornadoes, and other severe storms.21 Research to find
ways to predict earthquakes is currently being conducted by the U.S. Geological
Survey (USGS) and other federal and state agencies, as well as universities and
private institutions. Some experts, particularly those at the National Earthquake
Information Center, believe that scientists will ultimately be able to forecast
earthquakes. In August 2005, a joint team of scientists from Stanford University and
the USGS completed drilling a 2.4-mile-deep hole in the San Andreas fault in
California to establish the first continuous monitoring probe from inside an active
earthquake zone. The study is designed to determine if and how earthquakes can be
In 1946, a major earthquake and accompanying tsunami at Alaska’s Aleutian
Island Chain led to a tsunami that caused damage along the west coast of the United
States, Hawaii, and Japan. In response, the United States and Japan established the
Pacific Tsunami Warning Center (PTWC). The PTWC is the operational center for
the International Tsunami Warning System in the Pacific (ITWSP), which comprises

26 member states around the Pacific.22

The ITWSP issues warning for Pacific Basin tsunamis. Most countries with a
coastline on the Indian Ocean (except Thailand and Singapore) are not members of
the ITWSP. This absence of a tsunami detection and warning system, the fact that
tsunamis have been infrequent in the Indian Ocean, and that most people were
unaware of the approaching waves, underlie the devastating impact of the 2004
Indonesian tsunami. While it took between 90 and 150 minutes after the earthquake
for the seismic sea waves to reach the South Asian and East African coastlines, there
was no established mechanism to pass warnings to the countries around the Indian
Ocean’s shores. Among the reasons cited by delegates to the United Nations World
Conference on Disaster Reduction (WCDR) held in Kobe, Japan from January 18
through January 22, 2005, for the absence of a tsunami warning and mitigation
system from the Indian Ocean Basin region include the complacency that results from
the infrequent occurrence of tsunamis in the Indian Ocean; reluctance, for political
reasons, among the countries in the region to cooperate; and the cost of coordinating
emergency response agencies and maintaining a national communication network to
spread the word to coastal communities.
Plans are currently underway within the jurisdiction of U.N. Educational,
Scientific and Cultural Organization’s Intergovernmental Oceanographic
Commission (UNESCO/IOC) to expand the Pacific Ocean’s tsunami detection and
warning system to the rest of the world’s oceans. Delegates to the WCDR had agreed

21 Center for Earthquake Research and Information, The University of Memphis, “100%
Chance of an Earthquake Today,” available at [http://www.ceri.memphis.edu/public/
22 The 26 Tsunami Warning System (TWS) participating member states are Australia,
Canada, Chile, China, Columbia, Cook Islands, Costa Rica, Democratic People’s Republic
of Korea, Ecuador, El Salvador, Fiji, France, Guatemala, Indonesia, Japan, Mexico, New
Zealand, Nicaragua, Peru, Republic of the Philippines, Republic of Korea, Russian
Federation, Samoa, Singapore, Thailand, and the United States. For more information see
[ ht t p: / / www.ge ophys.washi ngt on.edu/ t s unami / gener al / war ni ng/ war ni ng.ht ml ] .

to establish within one year a regional Indian Ocean tsunami early warning system
that draws on the existing system in the Pacific Ocean. Proposals for a new tsunami
early warning system that features technologies yet to be developed was to be
considered at a later time when more permanent measures could be taken.23
In June 2005, at the 23rd Assembly of UNESCO’s International Oceanographic
Commission (IOC), delegates formally launched the Indian Ocean Tsunami Warning
and Mitigation System (IOTWS).24 The purpose of the meeting was to bring together
experts representing interested member states and relevant regional and international
organizations to continue the process of harmonizing and defining the scope and
characteristics of early warning initiatives already offered by the United States,
Japan, India, France, Germany, and Australia following the 2004 tsunami.
In a related matter, the U.S. Government, in coordination with UNESCO, has
been actively promoting the creation of an all-hazard25 approach in disaster
management.26 The plan calls for implementation of a global warning system that
would provide a comprehensive, integrated international framework for monitoring,
detecting, warning, communicating, and mitigating the effects of natural disasters.
Following the World Summit on Sustainable Development in Johannesburg, South
Africa in 2002, an ad hoc intergovernmental group, called the Group on Earth
Observation, committed itself to build within 10 years the Global Earth Observation
System of Systems (GEOSS). The GEOSS is an effort by 60 countries, the European
Commission, and more than 40 international organizations. The GEOSS would link
the many thousands of individual pieces of space-, air-, land-, and ocean-based
technology that gather Earth observations around the globe. In July 2003, the United
States had launched the GEOSS process with the First Earth Observation Summit in
Washington, DC, which was followed by the Tokyo Summit in 2004 and the Brussels
Summit in February 2005. At the Brussels Summit, the 54 nations adopted the
GEOSS implementation plan for the new global tsunami detection and warning
On August 3-5, 2005, the IOC convened another meeting in Perth, Australia, to
begin work on developing a coordinated global all-hazards early warning system, as
resolved by the 23rd Assembly of UNESCO’s IOC meeting in Paris in June, 2005.27

23 Eric Johnson, “U.S. Eyes Lead Role in Tsunami Alert System,” Japan Times, Jan. 21,

2005, p. 1.

24 For more information on the followup activities to establish a tsunami warning and
mitigation system in the Indian Ocean and other ocean basins, see UNESCO/IOC, “Towards
the Establishment of a Tsunami Warning and Mitigating System for the Indian Ocean,”
located at [http://ioc3.unesco.org/indotsunami].
25 The term “all-hazard” includes drought, earthquake, wildfire, flood, typhoon, hurricane,
landslide, volcanic eruption, and tsunami.
26 See Statement of Ambassador Howard H. Baker, Jr. to the U.N. World Conference on
Disaster Reduction held in Kobe, Japan on January 20, 2005, located at
[http://canberra.usembassy.gov/hyper/2005/0121/epf507.htm] .
27 See European Association of Remote Sensing Companies, “Design Global Ocean-Related

Delegates to the WCDR in Kobe, Japan, had noted that the major challenge to
working internationally to build a global warning system will be bringing together
numerous Earth Observation (EO) sources and data sets and creating a network for
distribution of data and information products and services that different nations can
access quickly and uniformly. This new system was supposed to integrate
technology from space satellites and observation posts covering oceans, earth,
atmosphere, and ecosystems. UNESCO announced plans at the WCDR to convene
the Third International Conference on Earth Warning in Bonn, Germany, on March
27-29, 2006, to assess and prioritize the different early warning systems, including
the technological, financial, and social issues involved.28
The insurance and financial industries have expressed support for a global all-
hazards warning system that could predict the behavior of the earth: its weather,
climate, oceans, atmosphere, water, land, natural resources, ecosystems, and natural
and human-induced hazards. This system would allow them to: (1) use global
atmospheric and environmental information to reduce loss of life and property from
disasters; (2) enhance the industry’s existing catastrophe risk assessment and
management capabilities; and (3) support the growing global market for catastrophe
risk management. Insurers and reinsurers will likely leverage the new GEOSS
capability to make decisions regarding insurance pricing, underwriting, risk transfer,
loss mitigation, portfolio optimization, and growth strategies.
National Tsunami Hazard Mitigation Program
Delegates to the WCDR generally agreed that technology is only one part of any
tsunami detection and warning system; there must be an associated development of
mitigation and preparedness strategies for which governments in the region must
assume primary responsibility. For this reason the U.S. Geological Survey, along
with NOAA, FEMA and the coastal communities in Alaska, California, Hawaii,
Oregon, and Washington, maintain the National Tsunami Hazard Mitigation Program
(NTHMP) to address tsunami hazard assessment, warning, and mitigation. The
NTHMP hosts the Center for Tsunami Inundation Mapping Effort (TIME), which
develops maps of potential tsunami flooding. In addition, each participating state has
a tsunami mitigation resource center that provides tsunami education material to the
The NTHMP was created following the April 1992 California
earthquake/tsunami, when Congress passed legislation to instruct NOAA to work
with the Pacific states to design a program to mitigate tsunami risks. The program
called for the installation of new technology to detect offshore earthquakes and
tsunamis, increased efforts in the area of public education and, as indicated above,

27 (...continued)
Hazards Early Warning System”, located at [http://www.earsc.org/web/template.php?
page=indivi dual&ID=111]
28 See Opening Address Statement of Jan Egeland, Under-Secretary General for
Humanitarian Affairs, Emergency Relief Coordinator, and Chair of the International
Strategy for Disaster Reduction, before the Bonn early warning conference, located at
[ ht t p: / / www.ewc3.or g/ upl oad/ downl oads/ openi ng_addr ess_egel and.pdf ] .

the creation of TIME. The NTHMP’s Center produces maps of future flooding that
are used for delineation of evacuation routs and long-term planning in vulnerable
coastal communities.
NOAA’s Tsunami Ready Program
Coastal communities in the United States that face tsunami hazard risks can also
participate in the NOAA Tsunami Ready Program, which since the late 1990s has
promoted tsunami hazard education and preparedness. The Program is a
collaboration among federal, state, and local emergency management agencies, the
public, and the National Weather Service (NWS) to support tsunami awareness and
mitigation efforts among communities at risk. As of December 2005, there were 24
TsunamiReady sites in six states: Alaska, California, Florida, Hawaii, Oregon, and
Washington.29 In November 2005, the NWS recognized Hawaii as the first entire
state to receive the designation of TsunamiReady.30 Hawaii received the designation
because all four of the state’s counties met the criteria for designation as
TsunamiReady. The program, whose goal is to improve public safety during tsunami
emergencies, requires communities to establish an emergency operation center, a
tsunami hazard plan, a community awareness program, and the ability to both receive
and disseminate NWS tsunami warnings (e.g., sirens and local media).
The Administration’s Plan for Improving
Tsunami Detection and Warning Systems
On January 14, 2005, the Bush Administration announced plans to commit a
total of $37.5 million to upgrade and expand the U.S. tsunami detection and warning31
capability as part of GEOSS. The plan calls for: (1) NOAA to deploy 32 new
advanced technology Deep-Ocean Assessment Reporting of Tsunami (DART) buoys
— 25 in the Pacific and 7 in the Atlantic and Caribbean — for a fully operational
tsunami warning system by mid-2007; (2) installing 38 new sea-level monitoring/tide
gauge stations; (3) ensuring continuous staffing of the two existing Tsunami Warning
Centers; (4) upgrading the Global Seismographic Network (GSN), a partnership
between USGS and the National Science Foundation, with 137 globally distributed
modern seismic sensors to monitor seismic events in tsunami-prone areas; and (5)
expand the Tsunami Ready Program to improve community preparedness.

29 Roberto Ceniceros, “Tsunami Preparations Make Hawaii First State to Attain Readiness
Status,” Business Insurance, Dec. 26, 2005.
30 Ibid.
31 For more information on the Administration’s tsunami improvement plan, see “U.S.
Announces Plan for an Improved Tsunami Detection and Warning System,” Office of
Science and Technology Policy, Executive Office of the President, available at
[http://ostp.gov/html/tsunami FactSheet.pdf].

Insurance and Catastrophe Risk Management
The Indonesian tsunami of 2004 is a reminder of the role of insurance in
financing catastrophe losses and what happens when little of the total direct damage
is covered by insurance. The funds to rebuild in Asia and Africa after the 200432
tsunami came from foreign donors. Because of the low level of insured losses
caused by the 2006 Hawaiian earthquake, much of the property damages will be paid
by individuals and not private insurers or the federal government. Insurance,
however, has long played a major role in developed societies as a risk reduction and
risk spreading tool that enables activities to take place that might not otherwise occur
if an individual or business was forced to individually bear the risks associated with33
the activity. Insurance is thus an important and indispensable source of funds for
compensating disaster victims. It provides financial protection to those living in
disaster-prone areas, furnishes victims with rebuilding assistance and emergency
living expenses, and reduces income losses in the event of a disaster. Some
economists assert that natural disasters can, in some instances, promote an economic
stimulus because of the efficient funding and mitigation mechanism in place, and the34
opportunity to replace aged infrastructure and facilities.
Catastrophic and Non-Catastrophic Insurance Risks
There are distinct differences between catastrophic versus non-catastrophic
insurance risk and these differences are important as Congress considers what role,
if any, to pursue in covering the cost of catastrophes. Insurance coverage for non-
catastrophe losses is offered in the private market when insurers and reinsurers are
confident that they can predict the frequency of claims over time and set prices at a
level that allows them to cover expected losses and expenses that achieve an
adequate rate of return on capital commensurate with the risk they assume. Actuarial
analysis of non-catastrophic losses require sufficient recent historical claims (5-10
years) and exposure data to calculate the expected average incurred loss per future
exposure. Insurers will then develop rate structures (and underwriting guidelines)
that spread their risks broadly among policyholders in order to offer a price low
enough to attract many potential insurers into the market. Claims are paid from funds
generated through normal operation cash flow, asset liquidation, debt financing or
advance funding from reinsurance. In contrast to non-catastrophic losses, catastrophe
exposures such as earthquakes and hurricanes are infrequent and, when the disaster
strikes, there are losses to many potential insureds.

32 For more information on the humanitarian aspects of tsunami recovery, see CRS Report
RL32715, Indian Ocean Earthquake and Tsunami: Humanitarian Assistance and Relief
Operation, by Rhoda Margesson.
33 Economists note that insurance could also have the opposite effect of causing losses and
increasing the cost of losses for the economy as a whole. That is, the insurance may make
people more willing to build or operate in high-risk, flood-prone areas (moral hazard).
34 Eugene N. Gurenko, “Building Effective Catastrophe Insurance Programs at the Country
Level: A Risk Management Perspective,” in Catastrophe Risk and Reinsurance: A Country
Risk Management Perspective (London: Risk Books, 2004), p.15.

From an historical perspective, there have always been two fundamental
earthquake insurance problems: (1) the limited number of people who purchase
earthquake insurance; and (2) the limited capacity of the insurance industry to handle
the huge losses caused by earthquakes. The capacity to insure catastrophe risk is
limited because of the potential magnitude of losses, the sporadic and unpredictable
nature of earthquakes, and the existing regulatory system that discourages insurers
from accumulating loss reserves for catastrophes by taxing such reserves as profits.35
Most economists and regulators would agree that far too few property owners
in earthquake zones purchase earthquake insurance. These owners rely instead on
good fortune or federal emergency disaster relief assistance.36 Homeowners typically
decide not to purchase insurance or adopt loss-mitigation measures to reduce deaths,
injuries, and property damage. Homeowners may decide that disasters will not affect
them, utilize short time horizons in determining the expected benefits relative to the
up-front costs (rates and deductibles), or compare costs with potential benefits and
conclude that loss reduction measures are not good investments.37
The second problem with insuring against catastrophes is that the potential
magnitude of natural disasters relative to insurer’s surplus can be so large and
indeterminate that the insurance markets are unable to provide sufficient capacity at
acceptable prices. A review of the U.S. insurance industry reveals that its capacity
to handle large catastrophic losses may be substantially less than aggregate figures
suggests.38 A repeat of the 1906 San Francisco earthquake or the 1964 Alaska
earthquake in a heavily populated area, for example, could cost insurers up to $500
billion in damages. The “policyholders’ surplus” of the entire property and casualty
insurance industry stood at about $427.1 billion as of December 31, 2005.39 Only a
fraction of this industry-wide total surplus amount would be available to compensate

35 The Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting
Standard No 5: Accounting For Contingencies, prohibits companies from accruing
catastrophic reserves unless it was probable that the loss had already occurred. Under the
current federal tax provision, premiums collected by insurers that are put in a reserve fund
for catastrophes are treated like excess profits and hence taxed. The IRS tax codes currently
permit a “loss carry-back” of three years and a “loss carry-forward” of seven years so that
insurers can write off losses against taxes paid from three years back and seven years in the
future. For more information on the FASB Statement of Financial Accounting Standard No.

5, see [http://www.fasb.org/pdf/fas5.pdf].

36 Paul R. Kleindorfer and Howard C. Kunreuther, “Challenges Facing the Insurance
Industry in Managing Catastrophic Risks,” in The Financing of Catastrophe Risk, ed.
Kenneth A. Froot (Chicago: University of Chicago Press, 1999), p. 149.
37 Ibid., p. 152.
38 Property insurance policies that cover households and businesses do not cover damage
resulting from earthquakes, land shock waves, or tremors and loss from tidal wave caused
by an earthquake (i.e., tsunami). Coverage for earthquake damage is usually provided by
an endorsement to a homeowners and business insurance policy.
39 “Policyholders’ surplus” is insurance terminology designating what in other industries is
termed companies’ “net worth” or “owners’ equity.” It is a measure of the capacity of
insurers to underwrite policies, and it must increase to meet the demands of a growing U.S.
economy and claims from hurricanes and other natural hazards.

victims of a major earthquake. Insurers must rely on this same limited pool of capital
to pay for other potentially catastrophic and unpredictable risks, such as terrorism,
mold, and medical malpractice and asbestos liability claims. Insurers may have to
liquidate bonds and other financial assets in order to pay claims, triggering an adverse
impact on U.S. financial markets.40 Alternatively, individual states, notably
California and Florida, have put in place an insurance pooling mechanism to address
the small- to moderate-sized earthquakes and hurricanes, respectively.
The Role of Reinsurance
The insurance industry could not function without access to traditional
reinsurance. Reinsurance is purchased by insurers to hedge their own insurance
portfolios. Almost all insurers purchase reinsurance. A reinsurer assumes part of the
risk and part of the premiums originally taken by the insurer, known as the primary
insurer. Reinsurance is sold in layers. Reinsurers have their own reinsurers, called
Under a typical reinsurance transaction, a primary insurer transfers a layer of the
risks (and some of the premiums) to a reinsurer who, in turn, accepts a layer of risk
and passes the remaining risk to a retrocessionary. As an illustration, under a
300/100 “excess-of-loss” facultative reinsurance agreement41 between the primary
insurer and a reinsurer, if losses from a specific earthquake exceeds $300 million, the
reinsurer will cover the next $100 million in losses. An earthquake that costs less
then $300 million is paid entirely by the primary insurer. The reinsurer might choose
to transfer to a retrocessionary a portion or layer of the $100 million. In return for
assuming risk, the reinsurer (or retrocessionary) receives a reinsurance premium and
agrees to indemnify the insurer (or reinsurer) for claims falling within the terms of
the reinsurance agreement.
After the Northridge California earthquake of 1994, large national insurers
encountered difficulty in obtaining layers of reinsurance coverage at prices that they
considered affordable. As a result, insurers were forced to find new sources to
assume catastrophe risk, and they found it in the U.S. equity and debt markets that
offered insurers liquidity to expand their capacity to sell catastrophe insurance.
Investors, on the other hand, are attracted to securities that transfer catastrophe risk
to the capital markets — the so-called “insurance-linked securities” (ILS). They are
drawn to ILS because of the level of return depends solely on occurrence of a
catastrophe that triggers payment and is insensitive to economic factors like interest

40 Ross J. Davidson Jr., “Working Toward a Comprehensive National Strategy for Funding
Catastrophe Exposures,” Journal of Insurance Regulation, vol. 7, no. 2 (winter 1998),
p. 134.
41 The two most common types of reinsurance arrangements are treaty reinsurance and
facultative reinsurance. Under treaty reinsurance, the reinsurer agrees to assume a certain
percentage, up to preset limits, of all risks falling into the categories agreed in advance
between the two parties. By contrast, a facultative reinsurer agreement is used for very large
risks that treaties cannot absorb, and unique risks for which it is difficult to establish a
reinsurance treaty. Under the facultative reinsurance agreement, the reinsurer is free to
decline to cover a particular risk.

rates and credit default that give rise to systemic risk in other types of fixed income
investments. Some of the existing barriers to the expanded use of ILS are that they
tend to be more expensive than traditional reinsurance. Partly that is because the risk
premium investors demand for assuming unfamiliar types of risk is expensive to
structure. Also, they require the creation of offshore special purpose companies.
Although the number of ILS transactions are still relatively small, the markets for
these financial instruments are expected to grow in the future.
California Earthquake Authority
Since 1985, residential property insurers in California have been required to
offer earthquake insurance coverage to all residential policyholders.42 This
requirement was not a problem for insurers until the Northridge earthquake of 1994,
which caused an estimated $12.5 billion in insured losses, according to the Insurance
Services Office (ISO). After the Northridge earthquake, most insurers either stopped
selling new homeowners insurance policies in the state or greatly restricted the sales
of such policies. In 1996, as a result of this lack of available homeowners insurance,
the California state legislature created a privately financed, publicly managed
organization — the California Earthquake Authority (CEA) — to offer primary
coverage on shake loss, a structural loss arising from a seismic event. The CEA does
not, however, cover losses arising from a subsequent fire, explosion, or water damage
(so called non-shake damage). Those perils are covered by a standard homeowners
or commercial property policy.
The CEA began providing residential earthquake insurance in December 1996
with a $10.5 billion funding package. The CEA had about 731,000 policies in force
in the state at the end of 2003. In terms of funding, the CEA is structured in layers
with a total claims-paying capacity of $7.2 billion. The funding structure is as
follows: the first $475 million in claims payments would come from the working
capital of the participant insurers. These insurers would also be responsible for the
next $2.15 billion in losses, which would be collected as assessments. The higher
layers are provided by reinsurance payments ($2.5 billion). CEA authorized
borrowing ($700 million), which is repaid through policyholder assessments totaling
up to 20% of the earthquake premium and post-event assessments on participating
The number of California residential property owners covered by a CEA
earthquake insurance policy has plummeted in recent years. According to the
California Department of Insurance, between 1999 and 2003, there was a 51%
decline in the number of earthquake policies in the state.43 In 2004, only 13.3% of
California homes had residential earthquake insurance coverage, down from about

42 California Assembly Bill 2865, the Earthquake Insurance Act (codified at Cal. Ins. Code
§ 10081 et seq.), went into effect on Jan. 1, 1985
43 California Department of Insurance, News Release: State Insurance Commissioner John
Garamendi Proposes Creation of National Disaster Insurance Program, Oct. 6, 2004.

30% in 1996.44 Some of the reasons cited for the decline are the high cost of
supplemental coverages, high deductibles (10%-15%), policy limitations, and
consumer apathy.45 California Insurance Commissioner John Garamendi, who stated
that the cost of rebuilding after natural disasters is making insurance more costly and
less available for many Californians, has proposed the creation of a national natural
disaster insurance program.
The Role of Federal Government
Insurance companies insist that in the aftermath of a series of unprecedented
insured losses since 1989, and particularly after Hurricanes Katrina, Rita and Wilma
in 2005, they cannot continue to provide coverage for large-scale natural disasters as
they have done in the past. They state that to do so would expose them to the
possibility of (1) insolvencies or significant loss of earnings and policyholder surplus,
(2) forced asset liquidation to generate cash to pay claims, and (3) the risk of having
their rating downgraded.
In the aftermath of the 2004 Indonesian tsunami and other catastrophic events,
certain public policy issues and questions have been raised. Examples include the
potential effects of a catastrophic earthquake on the solvency and claims-paying
capacity of the insurance industry, and the possible role of the federal government in
providing a financial backstop to property insurers who provide insurance against
natural hazard risks.
The federal government currently plays an important role in catastrophic risk
management by providing early warning, emergency assistance, and resources to help
long-term recovery. Should the federal government expand its role into both the
assessment of the financial risks associated with tsunamis, and the management of
such risk, with federal disaster insurance? It has been suggested that a federal role
in this area could be justified as necessary to: (1) ensure the adequate capacity and
solvency of the insurance industry to meet the growing consumer demand for
protection against natural hazard risks; and (2) minimize uninsured losses and, hence,
reduce federal outlays for disaster relief and construction costs, as well as ensure
stable economic growth and fiscal management.
A similar debate surrounding the creation of federal disaster insurance program
occurred following the 1964 earthquake and accompanying tsunami at Alaska’s
Prince William Sound. A federal flood insurance program — the National Flood
Insurance Program (NFIP)46 — was enacted in 1968 in response to the 1964 tsunami,
and Congress later addressed the nation’s exposure to earthquake hazards with the

44 Jeff Bertolucci, “Earthquake Policies Dwindle in California,” Los Angeles Times, Nov.

28, 2004, p. K8.

45 Ibid.
46 The National Flood Insurance Program was established under the National Flood
Insurance Act of 1968 (P.L. 90-448, title XIII, § 1360, Aug. 1, 1968, 82 Stat. 476, codified
at 42 U.S.C. §§ 4001-4128).

creation of the National Earthquake Hazards Reduction Program (NEHRP) in 1977.47
Before the creation of NEHRP, there was no coherent federal policy to encourage
research on and implementation of ways to reduce earthquake losses. Congress
explicitly chose not to implement a federal earthquake insurance program at that time
because the justification had not been convincingly made that the earthquake hazards
could not be insured by the private sector.48
In the absence of federal disaster insurance, some states have filled the gap in
the availability of catastrophe insurance protection by establishing public/private
insurance partnerships for insuring the “uninsurable” catastrophe risk. The question
today is whether a federal disaster insurance/reinsurance program for earthquakes is
needed. Congress may be asked to consider establishing a federal disaster insurance
scheme, and at the same time to consider the effects on consumers of insurers having
successfully limited their liability to earthquakes and other natural hazard risks —
without congressional assistance. Insurers operating in disaster-prone states have
taken steps to limit insurance industry liability in future disasters, while individuals
and taxpayers are assuming increased risk and financial exposure through the use of
narrow policy terms, higher deductibles, and state-sponsored insurance pools in
Hawaii, Florida, and California. Moreover, in some states, large national property
insurers have created single-state affiliates to segregate the holding company’s capital
for catastrophe-related insured losses.49
Members of the 110th Congress might opt to examine the affordability and
availability of natural disaster insurance for homeowners, and consider proposals for
improving insurers’ access to capital in the reinsurance, banking, and securities
markets in order to ensure adequate capacity and solvency of the industry to meet
consumer needs. In the aftermath of Hurricanes Katrina, Rita, and Wilma in 2005
and the 2006 Hawaii earthquake, some of the policy questions that might arise are:
!What quid pro quo would taxpayers get for providing a financial
backstop for the insurance industry?

47 The NEHRP was established by the Earthquake Hazard Reduction Act of 1977 (P.L. 95-
124; 91 Stat. 1098; Oct. 7, 1977). The NEHRP consists of four agencies: Federal
Emergency Management Agency (FEMA); National Institute of Standards and Technology
(NIST); National Science Foundation (NSF); and United States Geological Survey (USGS).
The goals of NEHRP are to: (1) reduce earthquake losses; (2) improve techniques to reduce
seismic vulnerability of facilities and systems; (3) improve seismic hazards identification
and risk-assessment methods and their use; and (4) improve the understanding of
earthquakes and their effects. For more information see [http://www.fema.gov/hazards/
earthquakes/nehrp], visited March 30, 2005.
48 See letter of transmittal accompanying the Federal Insurance Administration report issued
pursuant to Section V of the Southeast Hurricane Disaster Relief Act of 1965 from George
K. Bernstein, Federal Insurance Administrator, to Honorable George W. Rommey, Secretary
of Housing and Urban Development, dated November 23, 1971. The letter was included as
the foreword to the Report.
49 After the 2004 hurricane season and its unprecedented losses, the holding companies of
some large national insurers transferred funds to their Florida affiliates to pay claims.

!What is the role of state insurance departments vis-à-vis federal
!Is current insurance regulation conducive to creating private sector
incentives for mitigation?
!Who subsidizes whom?
These are just some of the policy questions that the 110th Congress might be called
upon to debate in considering proposals to establish a federal catastrophe reinsurance
Past Congressional Efforts to Create a Federal
Disaster Insurance Program
At various times during the 1990s, concerns were expressed by insurers,
reinsurers, policymakers, and researchers about the potential vulnerability of the
insurance industry to a catastrophic earthquake, and what role, if any, the federal
government should play in financing natural hazard risks. Members of Congress
were grappling with such issues as how can the framework of funding sources
available for catastrophe insurance be expanded to ensure adequate capacity and
solvency of the industry? In response to similar policy concerns following the
Indonesian tsunami, Hurricane Katrina, and America’s continued vulnerability to
seismic hazard risks, the 110th Congress might be asked to consider natural disaster
legislation to address the availability and affordability of natural disaster insurance
for residential and commercial property.
Historically, efforts in both the executive and legislative branches of the federal
government to create a comprehensive system of federal disaster insurance actually
go back 40 years to 1965, when Congress enacted the Southeast Hurricane Disaster
Relief Act.51 In response to Hurricane Betsy in 1965 and the earthquake and tsunami
at Alaska’s Prince William Sound a year earlier, Section 5 of that act directed the
Secretary of Housing and Urban Development to
undertake an immediate study of alternative programs which could be established
to help provide financial assistance to those suffering property losses in flood
and other natural disasters, including alternative methods of Federal disaster
insurance, as well as the existing flood insurance program, and shall report his
findings and recommendations to the President for submission to the Congress
not later than nine months after the appropriation of funds for this study, except
that the findings and recommendations on earthquake insurance shall be reported
to the President for submission to the Congress not later than three years after the52

appropriation of funds for this study.
50 See CRS Report RL33086, Hurricane Katrina: Insurance Losses and National Capacities
for Financing Disaster Risk, by Rawle O. King.
51 P.L. 89-339; 79 Stat. 1301, Nov. 8, 1965.
52 Ibid.

A federal flood insurance program was enacted in 1968. Another decade ensued
before enactment of the omnibus Earthquake Hazards Reduction Act of 1977.53 The
1977 law signaled a new federal focus on seismic hazard risks.54 Prompted in part
by the 1975-76 predictions of earthquakes in China and California, and the
realization that 70 million Americans had settled in high-risk earthquake regions on
both coasts, there was a doubling of federal spending on earthquake preparedness and
research into both the physical processes triggering earthquakes and the social and
scientific aspects of risk communication and hazard mitigation adoption.55
The Federal Insurance Administration (FIA) report issued pursuant to Section
5 of the Southeast Hurricane Disaster Relief Act of 1965, concluded that
earthquake insurance is readily available on one-to-four-family residential
dwellings throughout the United States, that earthquake insurance premiums are
neither excessive nor unreasonable, that the availability of earthquake insurance
on commercial and industrial properties is limited on the basis of the enormous
exposure in these areas, that the present deficient state of knowledge and data
concerning earthquake occurrences, and the inadequacy or absence of land use
and control measures designed to reduce earthquake losses, precludes a program
of greater breadth than that offered at present by the private insurance industry.
Therefore, we find that direct involvement of the Federal Government in
earthquake insurance was unnecessary as to residential properties and infeasible56
or undesirable as to commercial and industrial properties.
In essence, the FIA recommended that the federal government not implement
a national residential earthquake insurance program for three reasons: (1) there was
adequate private earthquake insurance to meet public demand; (2) local communities
facing the earthquake hazard had not taken the necessary steps to adopt and enforce
land use restrictions and building code measures designed to reduce potential
earthquake losses; and, (3) earthquake rate maps were inadequate for calculating
sound actuarial rates on properties located in hazard-prone areas.57
Although the 1971 FIA study took the position that damages caused by a
catastrophic earthquake did not require a federal insurance solution, the agency
suggested that federal earthquake insurance protection could be provided under

53 P.L. 95-124; 91 Stat. 1098, codified at 42 U.S.C. § 7701 et seq.
54 On Oct. 25, 2004, President Bush signed into law the National Earthquake Hazard
Reduction Program (NEHRP) Reauthorization Act of 2004 (P.L. 108-360).
55 “Disaster Response: Does the Country Need a New National Strategy?,” CQ Researcher,
vol. 2, no. 38 (Oct. 15, 1993), p. 901.
56 See Letter of transmittal accompanying the Federal Insurance Administration report issued
pursuant to Section V of the Southeast Hurricane Disaster Relief Act of 1965 from George
K. Bernstein, Federal Insurance Administrator, to Honorable George W. Rommey, Secretary
of Housing and Urban Development, dated Nov. 23, 1971. The letter was included as the
foreword to the Report.
57 Department of Housing and Urban Development, Federal Insurance Administration.
Report on Earthquake Insurance to the Congress of the United States Pursuant to Section
Five of the Southeast Hurricane Disaster Relief Act of 1965 (P.L. 89-339), Nov 23, 1971.

certain conditions. The de facto conditions for federal participation in a national
earthquake insurance program included the demonstrated proof that (1) adequate
insurance could not be provided by the insurance industry; (2) the insurance
industry’s financial resources could not handle the financial consequences of a major
disaster; and (3) local communities had adopted and enforced loss reduction
The Earthquake Hazard Reduction Act of 197758 established a multi-agency
program designed to develop and disseminate knowledge for reducing the impacts
of earthquakes. The act also directed the President to study the appropriate role of
compensating the victims of earthquakes and promoting increased mitigation efforts
on the part of states and localities, individuals, and private organizations. It did not
provide for the establishment of an explicit national earthquake insurance program.
The John H. Wiggins Company performed the FIA study required under the terms
of the Earthquake Hazard Reduction Act of 1977. The four reports produced for the
FIA highlighted the lack of consensus among geologists, seismologists, and insurance
experts as to the existence of an earthquake insurance problem and the potential role,
if any, for the federal government.59 Uncertainty and lack of consensus among these
experts about a federal role in disaster insurance continued into the 108th Congress.
Since the 1980s, Congress has considered several legislative measures to
establish a federal catastrophe insurance program, but none has been enacted except
with respect to acts of terrorism (a man-made disaster). The 107th Congress approved
creation of a federal backstop for private-sector terrorism insurance coverage in
response to the events of September 11, 2001.60 On December 22, 2005, President
Bush signed into law the Terrorism Risk Insurance Extension Act of 200561 to extend
the program two years through December 31, 2008.
106th and 107th Congresses. The closest Congress came to passage of a
federal natural disaster insurance bill was during the 106th Congress, when Members
debated two major initiatives: H.R. 2749, the Policyholder Disaster Protection Act,
and H.R. 21, the Homeowners Insurance Availability Act. (The Senate versions of

58 P.L. 95-124.
59 These four reports are as follows: Dan Anderson, William J. Petak, and Carl E. Widell,
Earthquake Insurance Practices. Report Prepared for the Federal Insurance Administration
(Redondo Beach, CA: J. H. Wiggins Company, 1981); Arthur A. Atkisson and William J.
Petak, Earthquake Insurance: A Public Policy Analysis. Report Prepared for the Federal
Insurance Administration (Redondo Beach, CA: J. H. Wiggins Company, 1981); Jarrell C.
Yarbrough, Jean Fuller and Arthur A. Atkisson, Federal Disaster Assistance and
Earthquake Insurance: Problems and Proposals. Report Prepared for the Federal Insurance
Administration (Redondo Beach, CA: J. H. Wiggins Company, 1981); and Arthur A
Atkisson, William J. Petak, and Dan R. Anderson, Earthquake Insurance Issues Workshop.
Report Prepared for the Federal Insurance Administration (Redondo Beach, CA: J. H.
Wiggins Company, 1980).
60 For more information on the Terrorism Risk Insurance Act of 2002, see CRS Report
RS21979, The Terrorism Risk Insurance Act of 2002: A Summary of Provisions, by Baird
61 P.L. 109-144.

these bills were, respectively, S. 1917 and S. 1361. H.R. 2749 focused on tax policy,
allowing insurers to create tax-deferred reserves to fund future catastrophe losses
from natural disasters. H.R. 21 would have established a new federal Disaster
Reinsurance Fund to provide up to $25 billion in reinsurance coverage annually to
state insurance pools. On November 10, 1999, the House Banking Committee
reported the bill on a vote of 34 to 18. Although a vote in the full House was
scheduled, the House leadership did not bring the bill to the floor. There was no
similar action in the Senate. A similar bill was considered in the 107th Congress and
hearings were held, but no action was taken in the full House.
108th Congress. The 108th Congress considered several major federal disaster
insurance bills, but the one approach that received the most attention involved
changing federal tax policy to authorize tax-deferred treatment of private insurers’
catastrophe reserves. Allowing private insurers to build up catastrophe reserves to
pay natural disaster-related claims that have a low probability of occurrence, it is
argued, would lower insurers’ costs of holding capital and, in turn, lower the
premiums they must charge for a given level of disaster coverage. On the other side
of the argument is the U.S. Treasury’s loss of tax revenue from the insurance
industry. Would the lost tax revenue be an acceptable price to pay to achieve the
public goal of reducing overall disaster losses? How would someone measure
109th Congress. In the 109th Congress, Representative Ginny Brown-Waite
introduced the Homeowners’ Insurance Availability Act of 2005 (H.R. 846). This
bill would instruct the Secretary of the Treasury to implement a reinsurance program
that offers reinsurance contracts to regional catastrophe insurance pools.
Representative Brown-Waite also introduced the Homeowners’ Insurance Protection
Act of 2005 (H.R. 4366) that would establish the National Commission on
Catastrophe Preparation and Protection to advise the Secretary of the Treasury
regarding estimated loss costs associated with contracts for reinsurance coverage, and
authorize the sale of reinsurance contracts backed by the federal government to
eligible state catastrophe funds. Representative Mark Foley introduced the
Policyholder Disaster Protection Act of 2005 (H.R. 2668) that would amend the
Internal Revenue Code to allow insurers to make tax deductible contributions to a
tax-exempt policyholder disaster fund which could only be used to pay catastrophe
claims. Finally, Representative Carolyn E. Maloney introduced the Natural
Catastrophe Insurance Act of 2005 (H.R. 4705) to establish a federal program to
provide reinsurance for state natural disaster insurance programs.
Prior to Hurricane Hugo in 1989, the insurance industry had not experienced any
losses exceeding $1 billion from a single disaster. Today, a $1 billion disaster is
quite common, predictable, and manageable, but most insurance experts would agree
that the $100-$140 billion catastrophic event remains a challenge for the U.S.
property and casualty insurance industry. The science of estimating probable
maximum loss values and capacity limits has come a long way since the 1980s.
Insurers now have a much better understanding of solvency and insurability of events
and seismic risks. Sophisticated computer modeling techniques are now used to
make probabilistic statements about potential losses for any given geographic
location under various scenarios and to estimate rates.

Policy Issues
Congress has been reluctant to enact federal disaster insurance legislation
because of a lack of consensus on what will work and concerns about adequate
provisions for mitigation and avoidance of unnecessary government intrusion into
markets being served by private sector entities. Congressional reluctance to establish
a federal natural hazard insurance program has also been based on the recognition
that such a program would conflict with sociological, economic, and actuarial
principles that emphasize the “true” cost of government programs (the opportunity
cost of the funds), the forgone benefits of a competitive insurance marketplace (e.g.,
cost efficiency and rate competition) and the absence of consumer choice (the ability62
to decide whether to purchase coverage).
The federal government has historically played an important role in the economy
by assuming risks that the private sector either will not undertake at any price, or will
accept but at a price so high that most potential beneficiaries will not purchase the
coverage. For example, government risk-bearing now occurs in environmental
disaster, nuclear-plant accidents, toxic waste dumps, and flooding. Establishing an
explicit federal disaster insurance system to ameliorate the potential damages to
homes and commercial buildings stemming from natural disasters would represent
another government risk-bearing program — one that could expose taxpayers to
funding demands if program revenues fail to cover costs or returns are lower than
expected. Nevertheless, supporters of a federal disaster insurance program argue that
it would be justified by the national scope of the disaster problem, and the inability
of the private insurance industry to handle high payouts without federal government
Concluding Observations
The 2004 Indonesian earthquake and tsunami, which left over 280,000 people
dead or missing, and the 2006 Hawaii earthquake may cause some Members of
Congress to assess disaster policy, and, more specifically, the efficacy of a federal
disaster insurance/reinsurance program. Economic reasoning holds that there are
some situations in which insurance should not be available, or should be so
expensive that individuals will not want to buy it. As a society, however, we may
consider it too harsh to permit people to suffer the consequences of financial ruin
from having built without either the ability or the foresight to insure their property.
Consequently, the ultimate choice arguably may not be the optimal level of insurance
to produce economic efficiency. Instead, it may be to minimize the costs of disaster
If accepted, the perspective summarized above could well shape the legislative
approach. We know that disaster-prone states have filled the gap by establishing
state-sponsored insurance mechanisms for insuring the “uninsurable” catastrophic
risk. Given that the states have acted to provide catastrophe funding for the small-

62 Kleindorfer and Kunreuther, “Challenges Facing the Insurance Industry in Managing
Catastrophic Risks,” p. 93.

to moderate-sized hurricane and earthquake, Congress might consider a strict
economic approach that calls for fairly mild reforms of the insurance industry — that
still allows the possibility of people being uninsured (and not getting relief), and
thereby uses that outcome to encourage the public to engage in loss-prevention
measures. Alternatively, Congress might consider a potentially economically less
efficient approach that calls for the creation of a federal disaster insurance system at
the higher layers of coverage. Such legislation might, however, result in over-
investment in hazard-prone areas. In pursuing this potentially less efficient solution,
the approach might be one of finding the least expensive way of making sure
everyone is protected from major economic losses from natural disaster.