Blog: Earthquake Stories

Retrospectives and Commentary

money out of crack

Not the Earthquake Lottery: three important differences

The startup world loves using analogies when describing a new venture, like “The Zappos of personal finance,” or “Like Uber for car insurance.”

money out of crackAlong these lines, some have compared Jumpstart to “The lottery for earthquakes.”  Yes, payouts are automatic, but Jumpstart differs from the lottery in three important ways:

  1. First, Jumpstart is not a game of chance – the earthquake will happen, it’s just a matter of when.
  2. Second, Jumpstart payouts aren’t taxable!
  3. And finally, Jumpstart pays out for a reason: because you will have extra expenses after the quake.

On this last point – maybe you anticipate no extra expenses – you live on bedrock, you have a simple life, you can work from home.  But what about circumstances you can’t control?  Anything from minor detours to cancelled projects at work.

Take myself, for example; I’m optimistic, especially when traveling.  But after missing a plane one too many times, I’ve learned that there’s almost always an unforeseen delay.

So for Jumpstart, comparing to the ‘lottery’ doesn’t tell the whole story, but it might give a flavor.

Over to you: What extra expenses after a quake do you find plausible?  Implausible?  Why?

Chch aerial

Disposable Cities? What Christchurch taught us about Resilience

Quake strikes!  You’re safe, your building is standing.  No damage is visible, but soon you learn it has to be torn down… What?

Now think back to that minor crash in your 10-year-old car.  Only a small dent, but your insurance says it’s ‘totaled’ – repair costs exceed the car’s remaining value.  Your payout is the remaining value and you put it toward a new car (or not).

Something similar happened after the M6.3 earthquake in Christchurch, New Zealand five years ago today.  Buildings with as little as 10% damage were torn down instead of being repaired.  Downtown Christchurch was cordoned-off, parts of it for years, with no public access.  Nearly 70% of inside the blockade were demolished.  Recovery and rebuild will now take a generation.

Is this mentality of ‘disposable buildings’ acceptable for our cities?

Chch aerial

Here’s a specific example of the ‘total loss’ of Christchurch’s tallest building, the 26-story Grand Chancellor hotel.  Built with modern anti-seismic building codes, it experienced a noticeable tilt due to major damage in a segment of wall that supported several floors above the open-air drive lane.  An irregular structural layout put particular stress on that column, but all occupants stayed safe.

A formal engineering report points to causes and future-looking building code improvements.

I’m aware of a private engineering study that suggested the damage would be feasible to fix, with repair costs a fraction of the total building value at the time.   So why was it torn down?  It had become a marketing nightmare.  Customers would remember the photos for years.  They would be nervous about safety in aftershocks.  They would avoid the whiff of catastrophe at any cost.

This wasn’t an isolated example.  To the shock and dismay of the public, many Christchurch buildings with only minor damage are now demolished for similar reasons of public visibility.  The EERI post-earthquake report states it succinctly: “significant damage to critical elements was visible in a number of buildings.” (emphasis added)

Nor is the notion of disposable cities unique to Christchurch.  Throughout the US, even in a place like San Francisco where building standards are strictest, we could be in for a major after-shock at the number of buildings ‘totaled’ after the next big quake.

Granted, this isn’t quite the same ‘totaled’ as for car-insurance, but it begs the same question, and at a larger scale: Isn’t it wasteful?  In the long-run, maybe.  But modern-day developed-world construction requires a short-term mentality because of speculative financing.  What’s the right balance?

For many Christchurch buildings, the value of preserving reputation exceeded the cost difference between repair and rebuild.  Perception trumped scientific evidence: in this case, perception of safety.

Lesson: The gap between public expectation and reality means losses can spiral far beyond damage.  This is important not just for the construction industry but also policy and finance.  Closing the gap requires greater resilience – in our infrastructure, but also in our social and economic structures, as well as our individual decisions.

A call to ‘greater resilience’ doesn’t mean always ‘preparing for the worst.’  Building codes, for example, should continue their main goal to protect life-safety, and not necessarily expand to preserve property values.  But developers need ‘eyes wide open,’ first to know about, and then deliberately weigh the consequences of a disposable building, a disposable city.

At the civic level, we need to quantify and communicate future consequences of decisions otherwise pressured by a short-term outlook.  Standardized metrics of sustainability and resilience are an important first step.

As individuals, increasing resilience means giving ourselves options in how we respond.  For some of us, this might mean getting to know our neighbors so we can share resources if needed.  For others, it might mean greater savings or financial products that make it easier to pick up and start again.

Over to you:

Do you expect our cities to be ‘disposable’?  Is that OK?

What steps would build resilience at civic and individual levels?

my house in Oakland

What’s the Chance Your Insurance Will Pay Out after a Quake?

This is the second post in a two-part series.

In the last post, we saw that home damage is typically ‘all or nothing,’ and your fate depends on only a few factors.

Once you answer that, you might wonder how likely it is to ever see an insurance payout after a quake.  Here I’m talking about conventional insurance, not Jumpstart’s automatic-payout approach, which will pay out regardless of physical damage.

There’s now a user-friendly and scientifically-credible app that helps with this calculation.  With Temblor, you simply open the app, make any needed adjustments to the default location or other data about your home, and Voila!  You see a break-down of your seismic risk – specifically, your chance of exceeding certain damage thresholds.  It’s no coincidence that Temblor uses thresholds equal to common quake insurance deductibles: 5% and 15% of the replacement value. (and also 65%, which could be considered a ‘total loss’ requiring rebuild)

temblor screen shot

For my house in Oakland, Temblor got the location and the square footage (approximately) correct, and it uses a reasonable replacement cost ($300/square foot).  It doesn’t know that the wall around our crawl space is retrofitted, so I adjusted the ‘Year Built or Retrofitted’ from ‘Before 1975’ to ‘After 1976.’

Conveniently, as I was writing this post, Temblor added a new feature describing the likelihood of receiving a payout from an insurance policy that has a 15% deductible.  It tells me a 1 in 11 chance in 30 years, which is about 9%.  Roughly, this is 0.3% chance per year (9% / 30 years).  (This is not statistically precise, but it works for the sake of argument.) In other words, an earthquake policy on my house would pay out on average once in 300 years (1 / 0.3%).

Wait, what?  We know the earthquake will happen, but there’s only a tiny possibility of a payout?

What about a smaller deductible, say 5%?  From Temblor’s output chart, over 30 years I have a 6 in 10 chance of ‘no’ structural damage (I interpret this to mean less damage than a loss of $30,000, which would be a 5% deductible).  So the chance of exceeding a 5% deductible is 40% over 30 years (100% minus 60%).  Roughly, this is a 1.3% chance per year (40% / 30 years).

The next obvious question is, ‘Is this worth it’?

Continuing with the 5% deductible, I should then expect premiums to be about 1.3% of the potential payout.  Using the CEA premium calculator, and a $600,000 rebuild cost, premiums at my house would cost about $3,000 per year.  From this I can infer a $225,000 expected payout ($3,000 / 1.3%), which means expected losses of $255,000 ($225,000 plus $30,000 deductible).  This is more than 40% of my rebuild cost!  But per the previous post, my house should only experience a 40% loss if I have a major vulnerability.

What about a 15% deductible?  This would be a $1,600/year premium for my house.  And along the same lines, $1,600 / 0.4% chance per year = more than $400,000 of damage.  Either way, CEA seems to think my house will be a total loss.

What this means, to me at least, is that conventional insurance is ‘worth it’ only if you think a total loss is possible.

And total losses are typically limited to houses with a known vulnerability. (Refer to Part 1 in this series.)

Here’s another perspective: Temblor also tells me the chances of a total loss (>65%) are 1 in 29 (3.4%) over 30 years, which is an annual probability of (roughly) 0.1% (one in 1,000 years).  In this case, let’s use the highest deductible of 25%, which is $150,000 ($600,000 * 25%).  In a total loss, my payout would be $450,000 ($600,000 minus $150,000).  So my premium ‘should’ cost around $450 per year ($450,000 * 0.1%), which still doesn’t match with the $1,100 premium that CEA estimates for my house with a 25% deductible.

Why don’t the numbers work out?

Simply put, there’s a factor of 4 to 5 between your ‘true’ risk and the cost of annual premiums, because there are too many ‘hands in the pot.’  Intermediaries drive costs through the roof.  Repeat: currently, conventional earthquake insurance costs up to five times more than the underlying risk.

Technology is quickly making it possible to minimize intermediaries as much as possible.  That’s the first of two reasons Jumpstart will be so much more affordable.  The second important reason is that Jumpstart covers just-enough to get you back on your feet, but not total losses.

Over to you: Do you expect a payout from conventional insurance when the quake occurs?  Why or why not?

Postscript: How Conventional Quake Insurance Works:

A conventional homeowner’s earthquake policy typically accompanies your standard homeowners’ policy (for fire and theft).  The limit (maximum payout) is the replacement value of your house, as specified in your standard policy.  For earthquake, you can choose from various deductibles specified as a percentage of that replacement value, for example, 5%, 10%, 15%, or 25%.  Just as for car insurance, the higher the deductible, the lower the annual premium.

Example: If you have conventional quake coverage on your home, with an insured replacement value of $500,000 and a 10% deductible, you would be responsible for the first $50,000 of property damage losses, and your insurance would pay for losses exceeding $50,000 up to $500,000.  You would be responsible for losses exceeding $500,000.

Important Note: Replacement value does not necessarily equal the market value of your home.