Order Code RL32847
CRS Report for Congress
Received through the CRS Web
Tsunamis and Earthquakes:
Is Federal Disaster Insurance in Our Future?
Updated February 24, 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?
Summary
In March 2005, aftershocks were still being felt months after 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.
Some insurance experts have suggested that a catastrophic earthquake could be
a financial calamity for the U.S. property and casualty insurers. As of December
2005, there were 24 TsunamiReady sites in six states: Alaska, California, Florida,
Hawaii, Oregon, and Washington. In November 2005, the National Weather Service
recognized Hawaii as the first entire state to receive the designation of
TsunamiReady. Hawaii received the designation because all four of the state’s
counties met the criteria for designation as TsunamiReady.
In the aftermath of the 2004 Indonesian tsunami and America’s continued
vulnerability to seismic hazards, Members of the 109th Congress might 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 coastline 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. The
1992 earthquake and tsunami led to the creation of the National Tsunami Hazard
Mitigation Program. 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.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Earthquakes, Tsunamis, and Early Warning Systems . . . . . . . . . . . . . . . . . . . . . . 4
National Tsunami Hazard Mitigation Program . . . . . . . . . . . . . . . . . . . . . . . 7
NOAA’s Tsunami Ready Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Administration’s Plan for Improving Tsunami Detection and
Warning Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Insured Losses from the 2004 Indonesian Tsunami . . . . . . . . . . . . . . . . . . . . . . . 9
Insurance and Catastrophe Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Catastrophic and Non-Catastrophic Insurance Risks . . . . . . . . . . . . . . . . . . 11
The Role of Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
California Earthquake Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Past Congressional Efforts to Create a Federal Disaster Insurance Program . . . . 15
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
List of Tables
Table 1. Ten Largest-Magnitude Earthquakes of the Past Century . . . . . . . . . . . 9
Table 2. Most Damaging Tsunamis Worldwide, by Mortality
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Tsunamis and Earthquakes:
Is Federal Disaster Insurance
in Our Future?
Introduction
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.1 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.2 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
lives.
The small proportion of residents in the Gulf Coast who had flood insurance
when Hurricane Katrina struck in August 2005 demonstrated to policymakers that
residents and business owners in hazard-prone areas should take steps to protect their
property. Katrina, which some industry observers called the “U.S. Gulf Coast
Tsunami,” reinforced the realization that the country has some exposure to
1 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.
2 These countries are: Bangladesh, India, Indonesia, Kenya, Malaysia, Myanmar, Maldives,
Seychelles, Somalia, Sri Lanka, Tanzania, and Thailand.

CRS-2
earthquake and tsunami hazard risks. In 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.3 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.4
In the aftermath of the 2004 Indonesian tsunami, 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)5 — was enacted in 1968 in response to the 1964 tsunami,
and Congress later addressed the nation’s exposure to earthquake hazards with the
creation of the National Earthquake Hazards Reduction Program (NEHRP) in 1977.6
3 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.
4 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,
The Tsunamis Preparedness Act of 2005, hearings, 109th Cong., 1st sess., Feb. 2, 2005, p. 2.
5 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).
6 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
(continued...)

CRS-3
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.7
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.8
Insurance companies insist that in the aftermath of a series of unprecedented
insured losses since 1989 they cannot continue to provide coverage 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. Insurers and reinsurers maintain that regulatory constraints in hazard-
prone states limit their ability to charge a premium that reflects the actual catastrophe
risk exposure, and this discourages sufficient capital from flowing into disaster
insurance markets.9 On the other hand, some consumers complain about exorbitantly
expensive earthquake insurance and scaled-back benefits, and choose to go without
6 (...continued)
(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.
7 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.
8 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.
9 Some economists observe that hundreds of billions of investment dollars could flow from
the global capital markets into the catastrophe insurance market if investors could earn
reasonable rates of return on these investments.

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earthquake insurance on their homes. In California, where the earthquake hazard risk
is most pronounced, only 13% of property owners have earthquake coverage.
Members of the 109th 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,
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? What is the role of
state insurance departments vis-à-vis federal control? 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 109th Congress might
be called upon to debate in considering proposals to establish a federal catastrophe
reinsurance program.10
Earthquakes, Tsunamis, and
Early Warning Systems
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.11
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).12 According to NOAA, during the last 204 years, 24 tsunamis
10 See CRS Report RL33086, Hurricane Katrina: Insurance Losses and National Capacities
for Financing Disaster Risk
, by Rawle O. King.
11 “When the Earth Moves,” Reinsurance: Global Risk Analysis, Feb. 2005, p. 14.
12 Tsunamis can also travel upstream in coastal estuaries and rivers, and cause damage
further inland than the immediate coast.

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have caused damage in the United States.13 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.14
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
predictable as hurricanes, tornadoes, and other severe storms.15 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
predicted.
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.16
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
13 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], visited Mar. 29, 2005.
14 Morgan O’Rourke, “Danger on the Coast: Coastal Catastrophe Risk,” Risk Management
Magazine
, Mar. 2005, p. 32.
15 Center for Earthquake Research and Information, The University of Memphis, “100%
Chance of an Earthquake Today,” available at [http://www.ceri.memphis.edu/public/
eqtoday.shtml], visited Mar. 25, 2005.
16 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
[http://www.geophys.washington.edu/tsunami/general/warning/warning.html], visited Jan.
6, 2005.

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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 U.N. 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 agreed 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 will be considered at
a later time later when more permanent measures can be taken.17 On March 5, 2005,
UNESCO convened a technical meeting of experts in Paris to build on the work of
the WCDR regarding the establishment of a Tsunami Warning and Mitigation
System for the Indian Ocean within a global tsunami warning and mitigation system
framework.18 The purpose of the meeting was to bring together experts representing
interested member states and relevant regional and international organizations to
begin 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.
The U.S. Government, in coordination with UNESCO, has been actively
promoting the creation of an all-hazard19 global warning system that would provide
a comprehensive, integrated international framework for monitoring, detecting,
warning of, 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 group is led by the United States, Japan, South
Africa and the European Commission, with 54 nations participating at the ministerial
17 Eric Johnson, “U.S. Eyes Lead Role in Tsunami Alert System,” Japan Times, Jan. 21,
2005, p. 1.
18 For more information on the followup activities to establish a tsunami warning and
mitigation system in the Indian Ocean and other ocean basins, see “International
Coordination Group for the Tsunami Warning System in the Pacific,” available at
[http://ioc.unesco.org/itsu], visited Mar. 29, 2005.
19 The term “all-hazard” includes drought, earthquake, wildfire, flood, typhoon, hurricane,
landslide, volcanic eruption, and tsunami.

CRS-7
level. The GEOSS would link observation systems, share information, and establish
working relationships with partner countries around the world with the aim of
reducing the loss of life and property due to disasters. In July 2003, the United States
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
system.
Delegates to the WCDR in Kobe, Japan 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
a conference in Bonn, Germany in early 2006 to assess and prioritize the different
early warning systems, including the technological, financial, and social issues
involved.
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
public.
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,

CRS-8
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.20 In November 2005, the NWS recognized Hawaii as the first entire
state to receive the designation of TsunamiReady.21 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 warning
capability as part of GEOSS.22 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 Seismic Network (GSN), a partnership between
USGS and the National Science Foundation, with 128 globally distributed modern
seismic sensors to monitor seismic events in tsunami-prone areas; and (5) expand the
Tsunami Ready Program to improve community preparedness.
20 Roberto Ceniceros, “Tsunami Preparations Make Hawaii First State to Attain Readiness
Status,” Business Insurance, Dec. 26, 2005.
21 Ibid.
22 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/tsunamiFactSheet.pdf], visited Mar. 28, 2005.

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Insured Losses from the 2004 Indonesian Tsunami
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 relief
and rehabilitation, which will likely run into the tens of billions of dollars.23 The
Insurance Information Institute in New York reported that the U.S. share of insured
losses is not expected to be significant.24 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.25
Table 1. Ten Largest-Magnitude Earthquakes
of the Past Century
Date
Country or Place
Magnitude
May 22, 1960
Chile
9.5
March 27, 1964
Alaska
9.2
November 4, 1952
Russia
9.0
December 26, 2004
Indonesia
9.0
January 31, 1906
Ecuador
8.8
March 9, 1957
Alaska
8.8
November 6, 1958
Kuril Islands
8.7
February 4, 1965
Alaska
8.7
August 15, 1950
India
8.6
November 11, 1922
Argentina
8.5
Source: National Earthquake Information Center, United States Geographic Survey,
[http://origin-wcatwc.arh.noaa.gov/tsunamiready/stats.pdf], visited Jan. 30, 2006.
23 For more information, see CRS Report RL32715, Indian Ocean Earthquake and Tsunami:
Humanitarian Assistance and Relief Operations
, by Rhoda Margesson.
24 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.
25 Charles Fleming, “Insurers May Face Limited Exposure from Tsunami,” Wall Street
Journal
, Dec. 28, 2004, p. A8.

CRS-10
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.26 This level
compares to $1,980 per capita spending on non-life insurance in the United States in
2003.27 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
Year
Location
Deaths
2004
South Asia, East Africa
175,000
1782
South China Sea
40,000
1883
South Java Sea
36,500
1707
Tokaido-Nankaido, Japan
30,000
1896
Sanriku, Japan
26,360
1868
North Chile
25,674
1792
South West Kyushu Island, Japan
15,030
1771
Ryuku Trench
13,486
1976
Moro Gulf, Philippines
8,000
1703
Tokaido-Kashima, Japan
5,233
1605
Nankaido, Japan
5,000
1611
Sanrika, Japan
5,000
1746
Lima, Peru
3,800
1899
Banda Sea, Indonesia
3,620
1692
Jamaica
3,000
1854
Nankaido, Japan
3,000
1933
Sanriku, Japan
3,000
1674
Danda Sea, Indonesia
2,243
1998
Papua New Guinea
2,182
1923
Tokaido, Japan
2,144
1570
Chile
2,000
1946
Nankaido, Japan
1,997
1766
Sanriku, Japan
1,700
2005
Sumatra, Indonesia
1,000
1964
Alaska, United States
119
Source: National Geophysical Data Center, National Oceanic and Atmospheric Administration,
[http://origin-wcatwc.arh.noaa.gov/tsunamiready/stats.pdf], visited Jan. 30, 2006.
26 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.
27 Ibid.

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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 recent
tsunami will likely come from foreign donors.28 Insurance 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 with the activity.29 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 the opportunity to replace
aged infrastructure and facilities.30
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.
From an historical perspective, there have always been two fundamental
earthquake insurance problems: (1) the limited number of people who purchase
28 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.
29 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).
30 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.

CRS-12
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.31
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.32 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.33
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.34 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 $415 billion at the end of 2005.35 Only a fraction
of this industry-wide total surplus amount would be available to compensate 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,
31 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], visited on Mar. 29, 2005.
32 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.
33 Ibid., p. 152.
34 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.
35 “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.

CRS-13
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.36 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
retrocessionaries.
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 agreement37 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
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
36 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.
37 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.

CRS-14
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.38 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
insurers.
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.39 In 2004, only 13.3% of
California homes had residential earthquake insurance coverage, down from about
30% in 1996.40 Some of the reasons cited for the decline are the high cost of
supplemental coverages, high deductibles (10%-15%), policy limitations, and
38 California Assembly Bill 2865, the Earthquake Insurance Act (codified at Cal. Ins. Code
§ 10081 et seq.), went into effect on Jan. 1, 1985
39 California Department of Insurance, News Release: State Insurance Commissioner John
Garamendi Proposes Creation of National Disaster Insurance Program
, Oct. 6, 2004.
40 Jeff Bertolucci, “Earthquake Policies Dwindle in California,” Los Angeles Times, Nov.
28, 2004, p. K8.

CRS-15
consumer apathy.41 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.
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 109th 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.42 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 the
appropriation of funds for this study.43
A federal flood insurance program was enacted in 1968. Another decade ensued
before enactment of the omnibus Earthquake Hazards Reduction Act of 1977.44 The
1977 law signaled a new federal focus on seismic hazard risks.45 Prompted in part
41 Ibid.
42 P.L. 89-339; 79 Stat. 1301, Nov. 8, 1965.
43 Ibid.
44 P.L. 95-124; 91 Stat. 1098, codified at 42 U.S.C. § 7701 et seq.
45 On Oct. 25, 2004, President Bush signed into law the National Earthquake Hazard
(continued...)

CRS-16
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.46
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 infeasible
or undesirable as to commercial and industrial properties.47
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.48
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
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
45 (...continued)
Reduction Program (NEHRP) Reauthorization Act of 2004 (P.L. 108-360).
46 “Disaster Response: Does the Country Need a New National Strategy?,” CQ Researcher,
vol. 2, no. 38 (Oct. 15, 1993), p. 901.
47 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.
48 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.

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disaster; and (3) local communities had adopted and enforced loss reduction
measures.
The Earthquake Hazard Reduction Act of 197749 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.50 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, 2001.51 On December 22, 2005, President
Bush signed into law the Terrorism Risk Insurance Extension Act of 200552 to extend
the program two years through December 31, 2008.
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 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
49 P.L. 95-124.
50 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).
51 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
Webel.
52 P.L. 109-144.

CRS-18
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.
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 success?
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 has 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 has 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 $60-$100 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.

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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 ability
to decide whether to purchase coverage).53
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
involvement.
Concluding Observations
The 2004 Indonesian earthquake and tsunami, which left over 280,000 people
dead or missing, 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 relief.
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-
53 Kleindorfer and Kunreuther, “Challenges Facing the Insurance Industry in Managing
Catastrophic Risks,” p. 93.

CRS-20
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.