1. Comparative Studies on the Similarities and Diversities of the Legislations Regarding Earthquake Insurance in Asia – Examples of U.S., Japan, New Zealand, Turkey and Taiwan
Asso. Prof. Kuan-Chun Johnny Chang
National Chengchi University College of Law and Dept. of Risk Management and Insurance
Taipei, TAIWAN

2. OUTLINE INTRODUCTION ISSUES ASSOCIATED WITH EARTHQUAKE INSURANCE
EARTHQUAKE INSURANCE MECHANISM – CASE OF U.S., JAPAN, NEW ZEALAND, TAIWAN and Turkey
SHOULD EARTHQUAKE INSURANCE BE COMPULSORY
CONCLUSION

3. INTRODUCTION

4. U.S.
The Northridge earthquake occurred on January 17, 1994, at 04:31 a.m. Pacific Time. It is estimated that total losses, excluding indirect effects, could reach as much as $40 billion.

5. Japan
On March 11, 2011, an 8.9 magnitude earthquake struck Northern Japan, which incurred property losses of 50 billion US dollars and approximately 210 to 300 billion in total economic losses (5.4% of the GDP)

6. New Zealand
On February 2011, Christchurch, New Zealand was hit by a 6.1 magnitude earthquake that caused property losses between 3~5 billion US dollars and 15 billion in total economic losses (10% of the GDP)

7. Taiwan
Taiwan’s 921 earthquake, a.k.a the Jiji earthquake, was of 7.3 magnitude. It occurred on September 21, 1999, and caused the death of 2,415 people and approximately US $10 to 12 billion in economic losses

8. Turkey
On October 2011, a 7.2 earthquake has struck Eastern Turkey, making it the most powerful earthquake to hit the country in ten years.
Direct economic loss to be in the order of million USD given past Turkish earthquakes, damage and intensities seen and the current economic status of the region. Boston-based AIR Worldwide Corp. estimated insured losses at $55 million to $170 million.

9. Risk Management Methods Risk Aversion Loss Control
Reduced Level of Risky Activity
Increased Precautions
Loss Financing
Retention and Self-insurance
Insurance
Hedging
Other Contractual Risk Transfers
Internal Risk Reduction
Investments in Information
Diversification

10. Earthquake insurance penetration is still quite low
low-probability/high-consequence nature
1. high transaction costs
2. insufficient international diversification of risk
3. low frequency incurs the wrong
perception
4. shrunken capacity, increased prices

11. government intervention
→insurable, affordable
Japanese Earthquake
Reinsurance policy
Japan
Earthquake
Commission
New
Zealand
government
intervention
the Residential
Earthquake Insurance
Program
Turkey
Turkish Catatrop-hic Insuranc-e Pool
Taiwan

12. ISSUES ASSOCIATED WITH EARTHQUAKE INSURANCE

13. Accessibility Randomness Mutuality Economic feasibility
modern earthquake
catastrophe
models have developed
Accessibility
→probability of catastrophic losses
is not private information
→moral hazard problem is less
likely to be seen
Randomness
Mutuality
→highly correlated risks
→spread large correlated catastrophe
risks through Worldwide catastrophe
Economic
feasibility
Affordability
Reinsurance service,
Catastrophe-linked securities

14. Lack of Demand 1. Perceived vulnerability 2. Ex post disaster relief
3. Potential victims view insurance as an investment
4. Households facing budget constraints may not voluntarily purchase insurance.

15. Lack of Supply
1. Usually concentrate on specified geographical area, highly correlative
2. The absence of data, the present imperfect scientific knowledge
3. The uncertainty of future events make reinsurers hard to price and reluctant to reinsure

16. Analysis
Problems remain with the supply side are the capacity of insurer and even the reinsurer, and the affordability of catastrophe insurance.
There is no guarantee that extremely large losses incurred in a single or multiple events are sufficiently financed by the insurance, reinsurance and catastrophe bonds.
When such losses exceed the insurance system’s and capital markets’ capacity, the only approach to compensate the shortage is to rely on ex post public borrowing or government financing.
Governments can keep the catastrophe insurance stay affordable through legislations.
When the government plays a role as a reinsurer, it charges an actuarially fair premium for its intervention so that reinsurance is an adequate resolution to the uninsurability problem result from affordability.

17. Analysis
Compulsory insurance helps to reduce the costs of government’s ex post disaster relief.
Government intervention can maintain the capacity of private insurance market and the affordability of insurance.
it is make sense to advocate the public-private partnership.
The lack of demand→lack of correct information
Through legislation, the government may make the catastrophe insurance or earthquake insurance compulsory in order to cure the asymmetry of information.

18. EARTHQUAKE INSURANCE MECHANISM IN ASIA– CASE OF JAPAN, NEW ZEALAND AND TAIWAN

19. EARTHQUAKE INSURANCE IN U.S., Japan, New Zealand, Taiwan and Turkey
The government can adopt several different approaches
1. the government can rely primarily on the private insurance market
2. the government can provide direct compensation to the catastrophe victims.
3. the government can institute mandatory comprehensive insurance.
4. the government itself can provide catastrophe insurance.
5. the government can share the catastrophe risk with the private sector by acting as a reinsurer of last resort.
6. the government can serve as an additional insurance layer.
7. new forms of government intervention, such as acting as a lender of last resort, have been proposed.

20. California Earthquake Authority (CEA)
Properties Covered
Basic residential earthquake coverage (1)for individually owned residential structures of not more than four units; (2)mobilehomes; (3)individual condominiums, townhouses, or certain other common interest development properties (collectively referred as “condominiums”); and (4)renters.
CEA does not offer insurance coverage for commercial, industrial, or business properties.CEA, Insurance Policy Information,
CEA standard Homeowners’ Policy
Homeowners inevitably have to purchase all four coverages, namely dwelling (Coverage A) and extensions to dwelling (Coverage B), personal property (Coverage C) and loss of use (Coverage D)
New Homeowners Choice policy
The Choice policy allows homeowners to choice either to purchase only Coverage A plus Coverage B or to add one or both of Coverage C and Coverage D.

21. California Earthquake Authority (CEA)
Premium
CEA’s premiums are based on science, not profit. 
By law, CEA rates must be sufficient to allow the CEA to remain financially sound, to pay its covered claims. 
The Companion Policy Requirement
The CEA issues basic residential earthquake insurance policies to any owner of a qualifying residential property as long as the owner has secured a policy of residential property insurance from a participating insurer.
The primary residential property insurance policy is known as the “companion policy” to the CEA policy. The CEA policy and its companion policy share the same fate including the renewal date and that of cancellation and termination.CEA, Policies effective on or after 01/01/2012,

22. California Earthquake Authority (CEA)
Coverage
Homeowners
Homeowners Choice
Coverage A & Coverage B - Combined Single Limit Dwelling and Extensions to Dwelling
Coverage to repair, or in the event of a total loss, replace, an insured home when damage exceeds the coverage deductible, up to the policy limit.
Included Coverage
Coverage Limit
Must be equal to the Coverage A limit on primary homeowners or mobilehome owners policy
Deductible
10% or 15% of your Coverage A & Coverage B - Combined Single Limit
Coverage C - Personal Property
Coverage to replace personal property such as furniture and household items, when damage exceeds the coverage deductible, up to the policy limit.
Optional Coverage
Coverage Limit Options
$5,000
$25,000
$50,000
$75,000
$100,000
Personal property is paid if your covered dwelling loss exceeds your Coverage A deductible
10% or 15% of your Coverage C limit. Your personal- property deductible is waived if your covered dwelling loss exceeds
your Coverage A deductible
Coverage D - Loss of Use
Coverage for additional living expenses, if you are unable to live in your home as a result of earthquake damage, up to the policy limit. There is no deductible for Loss-of-Use Coverage.
Included
$1,500
$10,000
$15,000
$25,000**
No deductible
Building Code Upgrade Coverage
Additional coverage which provides funds for bringing your home up to current building codes when repairing or replacing a home.

23. Japan Earthquake Reinsurance (JER)1 2 3
the “Law concerning Earthquake Insurance (the LEI)” and its Enforcement Order
“Earthquake Reinsurance Special Accounting Law (the ERISAL)” and its Enforcement Order .
the detail of the earthquake insurance coverage, standards of payments, caps of underwriting, reinsurance, accounting treatment were specifically addressed in the new legislations
On June , the Niigata caused 26 dead, 447 injured, and incurred damage to residences, 1,960 were completely destroyed, 6,640 were partially destroyed, 15,297 were flooded and 67,825 were partially damaged.

24. Japan Earthquake Reinsurance (JER)4 5 6
Pursuant to Article three of the LEI, the Japan Earthquake Reinsurance Co Ltd (JER), established with share capital of 1 billion yen by 20 domestic Japanese non-life insurance companies on May 30, 1966.
It covers losses to residential buildings and contents result from earthquake, volcanic eruption or tsunami including fire following such an event.
Premium rates vary in accordance with location, building age and standard.

25. Japan Earthquake Reinsurance (JER)
the liability sharing mechanism
3rd layer
3rd layer
2nd layer
1st layer
USD 1.4bn
over USD 66.3 billion
the government ,
the insurer of last resort
2nd layer
layer(half of the losses
exceeding USD 1.4 billion,
95% of losses exceeding
USD 10.5 billion up to USD
66.3 billion) →Government
Private + JER capped at USD 8.7 billion
Japanese
government +
Private+ JER
1st layer
private insurers +JER
Insurers and JER’s combined liability is capped at USD 1.4 billion.

26. New Zealand Earthquake Commission
EQC 1 2 3
Part I of the EQC Act: organizational structure, function, and power of the EQC, the management of the Natural Disaster fund.
1933, the Earthquake Commission (EQC)
It provides natural disaster insurance for residential property, administers the Natural Disaster Fund, and funds research and education on natural disasters and ways of reducing their impact.
Part II: The coverage is compulsory whenever fire insurance is purchased.

27. New Zealand Earthquake Commission
EQC 4 5 6
the insured property contains only one dwelling:
the excess percentage of claim would be 1% , the minimum and maximum amount payable is NZD $ 200 and NZD $ 1150 respectively.
Premium→private insurers→the Earthquake Commission
single rate of premium with maximum limit
Contracts made on or after 1 February 2012: 0.15%
If there are more than one dwelling:

28. New Zealand Earthquake Commission
If there are more than one dwelling:
(1) For damages to building, NZD $200 multiplied by the number of dwellings in the building or 1% of the amount payable, whichever is the greater;
(2) For damages to Land, NZD $500 multiplied by the number of dwellings in the residential building which is situated on the land, or 10% of the amount payable, whichever is the greater, to a maximum of $5,000;
(3) For damages to both a dwelling and personal property , when a person makes a claim for damage to both a dwelling and personal property located in that dwelling and the damage is caused by the same natural disaster, a single minimum payment of $200 applies across both claims.

29. New Zealand Earthquake Commission
the EQC Act imposed restrictions on the EQC’s power to limit the coverage or to cancel the policy.
→Article 28 of the EQC Act:a prior notice
→EQC can only cancel or limit cover in specific circumstances as manifested in Schedule 3 of the Earthquake Commission Act.
→EQC bears the duty to advise and explain.
EQCover is government guaranteed.

30. Taiwan Residential Earthquake Insurance Fund
TREIF 1 2 3
The Taiwan Residential Earthquake Insurance Fund (TREIF)
It began operation on 1 April 2002
a public non-profit organization
After the Ji-Ji earthquake on 21 September 1999, the legislature passed amendments to Article of the Insurance Law.
TREIF insures residential buildings against fire, explosion, landslide, land subsidence, land movement, land rupture, tidal wave, surge and flood caused by earthquake.

31. Taiwan Residential Earthquake Insurance Fund
TREIF 4 5
from January 1, 2012:
the maximum sum insured per policyholder → NTD $ 1.2 million
the maximum contingent living expense →NTD $200,000
flat premium
April 1, 2009:NTD$1,459 → NTD $1,350
With a maximum sum insured of NTD $1.2 million per policyholder.

32. TREIF 4th layer (January 1 2013) 3rd layer 3rd layer 4th layer
2nd layer
1st layer
NTD $3 billion
between NTD $ 53 billion to
$ 67 billion
Taiwanese government
4th layer
If losses incurred by a single catastrophe exceeds the capacity of the TREIF
(January )
3rd layer
4th layer
TREIF
government
2nd layer
TREIF
the next NTD $67 billion
Losses to be assumed by
the TRIEF are diversified to
the private reinsurance and
capital markets upto NTD $ 53
billion
1st layer
private insurers +JER
Insurers and JER’s combined liability is capped at USD 8.7 billion.
Local property & casualty insurance companies

33. Turkish Catastrophe Insurance Pool (TCIP)
Compulsory Coverage
Coverage for compulsory earthquake insurance is provided exclusively by the TCIP.
Condominium Law of 23/6/1965 No. 634, (i) independent sections in privately-owned buildings regarded as dwellings and has registered title deeds, (ii) independent sections situated inside residential buildings and used as business establishments, bureaus and for similar purposes, and (iii) the properties built by the State or through the loans provided due to natural disasters are subject to compulsory earthquake insurance.
Coverage
TCIP indemnifies the material damages - which are caused by earthquakes and the fires, explosions, tsunami and landslide that are caused directly by the earthquake within the limits stated in the TCIP earthquake policy.
does not cover losses incur from the enumerated incidents (i.e. removal costs, bodily injury…etc.).
The Sum Insured
TCIP provides maximum amount of insurance which is determined by the Treasury Minister every year and should be published in the Official Gazette owing to the increase in the construction costs.
Maximum sum insured amount offered by TCIP is 150 thousand Turkish Liras (approximate U.S. dollars) for all building types as of 1 January 2011.

34. Turkish Catastrophe Insurance Pool (TCIP)
Additional Loss Sharing
Where a major catastrophe takes place and sufficient protection cannot be provided through the national and international markets under favorable conditions for the risks undertaken by the TCIP, the Cabinet may decide that a portion is to be committed by the State, with the proposal of the Treasury Minister.
Insured’s duty of Loss Prevention
Insured of the TCIP policy are obliged to take the measures necessary to prevent the modification or the weakening of the building and each independent section.
Where it is discovered that the damage has occurred due to modifications against the project, affecting the bearing system adversely, insureds will lose their right to receive proceeds from the insurance.
TCIP’s Obligation to Disburse the Proceeds
TCIP to pay the insurance proceeds corresponding to claims related with the buildings which have compulsory earthquake insurance and which are damaged due to earthquake within thirty days at most following the completion of necessary information and documents, and the damage discovery efforts.

35. Turkish Catastrophe Insurance Pool (TCIP)
Premiums
Type of Construction
Risk Regions I II
III IV
Insurance Rates (percentage)
Steel and
concrete
2.20
1.55
0.83
0.55
Masonry
3.85
2.75
1.43
0.60
Other
5.50
3.53
1.76
0.78

36. Comparison CEA JER EQC TREIF TCIP Risks Covered
Damages caused to homeowners, mobilehome owners, condominium owners, and renters by earthquakes.
Losses arising concerning the object Insured due to fire, destruction, burial or flood directly or indirectly caused by earthquake, volcanic eruption or tsunami.
Losses cause from Earthquake or natural disaster (i.e. flood ).
Losses incurred by Earthquake
Material damages - which are caused by earthquakes and the fires, explosions, tsunami and landslide that are caused directly by the earthquake within the limits stated in the TCIP earthquake policy
Area where coverage is provided
Within the State of California
Domestic
Domestic (the earthquake map used by TCIP divides Turkey into five risk areas).
Entity bearing the liability of indemnity.
CEA is a publicly managed, primarily privately funded entity. CEA policies are sold and serviced exclusively through CEA’s participating insurance companies.
Private Insurers
JER (formed by private insurers)
Government
EQC (jointly capitalized by the government and private insurers)
Private P & C insurers
TREIF (funded by the government)

37. Comparison CEA JER EQC TREIF TCIP Duties of private insurers
Sale the CEA policy and provide coverage under CEA Homeowners Policy or Homeowners Choice Policy
Sale of earthquake insurance
Claim adjustment
Payment of proceeds
Partial Loss Sharing
Sale of earthquake insurance only
None.
Role of the government
The California Insurance Commissioner create the CEA and
Administer it and authorize CEA to provide Homeowners Policy and Homeowners Choice policy.
Partial Loss sharing & Reinsurance
Unlimited guarantee to the EQC
Partial Loss sharing , Reinsurance and unlimited guarantee to the TREIF
Insurance companies may issue Compulsory Earthquake Insurance on behalf of TCIP, and handle claims.
Burden of the Treasury
None
Yes.
Yes, need approval by Treasury Minister.
Comparison

38. Comparison CEA JER EQC TREIF TCIP
Caps of compensation in a single event
Up to USD $ but subject to insured’s choice.
5.5 Trillion Yen (USD $ 55 billion)
Unlimited
NTD 70 billion (USD $ 2.3 billion)
150 thousand Turkish Liras (approximate U.S. dollars)
Compulsory or voluntary
Voluntary
Building: Compulsory when voluntarily purchasing Fire Policy
Personal Belongings: Voluntary
Compulsory
Rate of premium
CEA’s premiums are based on science, not profit. 
Premium rates vary in accordance with location, building age and standard
Flat (0.05%)
Flat (0.12%)
From 0.44 % ~ 5.5% in accordance with five risk zones and three construction type.

39. Analysis New Zealand,Taiwan(low and flat rate)
→critiques: increase ex post moral hazard
This paper: affordability, availability
→the policy of introducing low and flat rate should be maintained.
Other prevention measures can still be enforced through other policy instruments, for example, the local building codes.

40. SHOULD EARTHQUAKE INSURANCE BE COMPULSORY

41. SHOULD EARTHQUAKE INSURANCE BE COMPULSOPRY?
Problem to Solve 1: homeowners’ lack of information
→disincentives of demand
Problem to Solve 2: make the earthquake insurance compulsory
→facilitate the supply of information, raise the penetration rate

42. SHOULD EARTHQUAKE INSURANCE BE COMPULSOPRY?
New Zealand
the earthquake coverage is
attached to homeowners’
Fire Insurance Policy
90%
46%
earthquake coverage can be
acquired on a voluntarily basis
Japan
penetration
rate
Taiwan
31%
earthquake coverage can be
acquired on a voluntarily basis

43. SHOULD EARTHQUAKE INSURANCE BE COMPULSOPRY?
CEA
About 12% (2012)
CEA began offering an alternative to their standard policy.
Turkey
About 26% (2011)
Comparing to 19% in 2007.
There are no legal penalties or fines for the enforcement of the “compulsory” earthquake insurance.

44. Arguments for Compulsory Earthquake Insurance
collective basis→cheaper insurance
cure potential victims’ scarcity of motivation to purchase coverage due to asymmetric information.
Advantages
compulsory insurance should be imposed on overconfident
individuals for their
own benefit

45. Arguments against Compulsory Earthquake Insurance
the demand for insurance may vary according to the individual risk situation of every possible victim.
information deficiencies→promote a mandatory disclosure of such information
shortages
cross-subsidization, negative redistribution
the concern of
anti-competition

46. Comments enhancing mandatory competition disclosure of has never been
the cross-subsidization
arguments
→compulsory
coverage in
risk-prone area
→charge additional
risk premium
potential victims are
still in lack of capability
in accurately assessing
risk despite that they
are provided with
certain information.
enhancing
competition
has never been
the policy goal of
the compulsory
insurance
mandatory
disclosure of
information
and mandatory
insurance does
not contradicts
with each other.

47. CONCLUSION
Insurance plays a crucial role in post-disaster financing and contributes to the acceleration of the recovery process.
This paper argues that the public-private partnership model will effectively enlarge the capacity of private insurers and simultaneously make the catastrophe insurance more affordable.
Japan, New Zealand and Taiwan, have all adopted the “public-private-partnership” model.
Introduction of the compulsory insurance will solve the problems on both the demand and supply side.