American readers may be surprised that we in NZ have been able to insure against earthquake damage. But all insurance comes with fine print.
When we decided to buy a house back in 2005, insurance was one of the first things on our minds; we wanted a place near the beach and tsunami risks were salient. After a lengthy phone call with our home contents insurer, AMI, we found that while full replacement cover would cover the rebuilding of our house in case of disaster, it wouldn't cover us were the land itself to disappear. The buildings are insured, but the land itself is not. AMI would build us a house of similar size and quality were the Brighton and SouthShore spit to disappear, but we'd have to buy the land on which to build it.
We consequently consulted with a geologist about the best spot to buy conditional on wanting to be near the beach; she warned us against being too close to the Estuary as a substantial tsunami risk came from the backwash after the initial wave. She circled the general neighbourhood that seemed least risky. So we bought our place on about a meter and a half rise from the road and protected from the Estuary by a park and school on the other side of the road; we comforted ourselves with that if anything serious enough to wash away the sand spit on which we live ever happened, the government wouldn't be able to constrain itself against bailing out folks who lost their land.
And now the worst's happened, but not for us. We're in the green zone where houses are damaged but the ground is fine. I have no clue how long it will take for the Earthquake Commission (who cover the first $100k damage to the house) and AMI (who will cover damage to the fences, pool, sidewalk and drive) to assess the damage and provide a quote, but eventually the house ought to be made right.
The government is, as expected, bailing out folks whose land can't be salvaged by providing two options. The government will either buy out the property at its 2007 assessed value (the last property tax assessment), or will buy out the land and let the owner deal with the insurance company for the house. Honestly, if somebody offered me the 2007 value of our house right now, I'd be tempted even though I hate moving and love our house; property values have dropped since then. There are more than a few folks who have wound up in a bit of a bad spot though: while the government has declared their land as non-remediable, their insurers say the house is repairable and so will only pay enough to cover repair rather than rebuilding costs. They could take Option 1, but that may not be sufficient to rebuild or buy elsewhere; if assessed section value is low relative to capital improvements, Option 2 can be a problem.
We'd always figured that, worst come to worst, we'd suffer uninsured losses on the section.
In other insurance news, the national government has become the insurer for quake-affected city councils; insurers aren't keen on providing coverage where the risks are as high as here. I wonder whether some kind of conditional bond issue could work. The government could put out a bond issue that would see the principal value of the bond cut in response to specified events, then auction off the bonds on the international market. It wouldn't be a cheap way of insuring, but it would be interesting to see how the markets would price those risks. How much would you pay for a New Zealand bond promising $100 in three years if no further earthquakes of magnitude 6.0 or up in Christchurch, but whose face value would drop $5 for each tenth of a point on the Richter Scale above 6 for any further events?