Financing Recovery After a Catastrophic Earthquake or Nuclear Power Incident [August 25, 2011] [open pdf - 637KB]
"In the aftermath of the recent East Coast earthquake (and shut down of the North Anna nuclear power plants) and Japan's technological and natural disaster, U.S. policymakers are asking if it could happen here and, if so, how associated costs would be financed. In the event of a major natural disaster, several catastrophe risk financing and insurance issues could arise, including (1) the need to revisit the nature, extent, and timing of potential earthquake and tsunami hazards in the United States; (2) the adequacy of nuclear third-party liability insurance capacity; and (3) the challenges of financing recovery from natural disasters and making earthquake insurance more affordable. The latter challenge is largely a function of the national financial markets' capacity to absorb the cost and economic burden of a devastating mega-earthquake. Given the economic devastation in Japan, there is heightened congressional interest in finding ways to reduce disaster risk for homeowners, insurance companies, financial firms, and both federal and state governments. This report examines earthquake catastrophe risk and insurance in the United States in light of recent developments. It examines both traditional and non-traditional approaches for financing recovery from earthquake losses as well as challenges in financing catastrophe losses with insurance. The report also explores the feasibility of a federal residential earthquake insurance mechanism and assesses policy implications of such a program. Finally, the report examines legislation introduced in the 112th Congress that addresses issues related to earthquakes, including S. 637, the Earthquake Insurance Affordability Act. S. 637 would authorize the U.S. Treasury to guarantee up to $5 billion in bonds available to certified public entities, like the California Earthquake Authority (CEA), following a catastrophic seismic event. The entity would have to exhaust its claims-paying ability before the federal guarantee becomes available. The measure is designed to reduce earthquake insurance rates by reducing the need to purchase reinsurance. The bonds would be repaid with premiums."
CRS Report for Congress, R41968