Earthquake will rock US banks

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Lack of California home insurance cover could add to woes

Impact Forecasting, a division of Aon Benfield, has warned that a major catastrophe such as an earthquake in California could further squeeze US mortgage companies because of a lack of home-owner insurance.

The Annual Global Climate and Catastrophe Report: 2008 highlights that the lack of mandatory earthquake insurance in the state of California would result in high levels of mortgage defaults should an earthquake occur.

Bryon Ehrhart, chief executive officer of Aon Benfield's Analytics division, said: "Freddie Mac and Fannie Mae - the beleaguered financial entities that helped provide liquidity to the US mortgage market - never required homeowners to purchase earthquake insurance for their properties. Approximately 86% of Californian homeowners do not have earthquake coverage, despite most of them having mortgaged their homes. The 1994 Northridge Earthquake cost the mortgage industry up to $400m (£265m) in mortgage defaults due to foreclosure expenses, property repair costs, lost interest income, write-downs of existing loan balances and other administrative costs. It is hard to believe that there could be further downside for investors in mortgages than experienced in 2008 but the earthquake risk to the mortgage market is real."

The report also said:

the most significant natural catastrophe in 2008 was the earthquake in China on 12 May. Very little insurance was in place on the destroyed properties, and the rebuilding costs are significant -- currently estimated at $146bn (£97bn).
he largest insured loss event in 2008 was Hurricane Ike, where costs are still being counted but it is likely to be the third most costly hurricane on record.
between 1995 and 2008 there has been an increase in the average frequency of hurricanes in the Atlantic Basin; eight hurricanes per year -- compared to a 59-year average of 6.2.
hurricane intensity has risen dramatically in the same period, with a 44.9% increase in Category 3, 4 and 5 hurricanes, and a 82.1% increase in Category 4 and 5 hurricanes.