California Insurance Commissioner John Garamendi is spearheading an effort to require people to buy catastrophe insurance. It seems like the program would be similar to the National Flood Insurance Program (NFIP), although details are still being worked on. The program would run on a national basis and may be mandatory.
Garamendi’s idea is that catastrophe insurance, such as flood or earthquake, is expensive now because only a select group of people purchase it. If the market expanded, whether voluntarily or forcibly, then the price would come down. Those people whose risk of having a loss is lower would essentially subsidize those whose risk is greater.
Insurance is a simple concept. People who have a risk of a loss pool their resources so that if a loss occurs the damage can be repaired. In this case, the people who are pooling their resources all live in earthquake zones, such as San Francisco. Garamendi’s proposal could require someone in Nebraska to buy earthquake insurance. Because the insurance companies are collecting premium from more people (and from people who will probably never file an earthquake claim), they can charge less money to the people who live in San Francisco.
Any national insurance program is a bad idea. The NFIP program does not work very well. I used to handle their claims and it was a disaster. This is a bad idea by a politician who is running for office and wants to make sure he has broad voter appeal.