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California quake could hit mortgage lenders -Aon
January 7, 2009 / 6:10 PM / 9 years ago

California quake could hit mortgage lenders -Aon

LONDON, Jan 7 (Reuters) - Poor earthquake insurance coverage in California means a major catastrophe in the quake-prone state could prove devastating for mortgage lenders as well as homeowners, the world’s No. 1 reinsurance broker has warned.

In its Annual Global Climate and Catastrophe Report, Aon Benfield AOC.N said widespread defaults could follow a big quake because U.S. mortgage giants Fannie Mae and Freddie Mac had not required borrowers to insure against earthquake damage.

“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,” Bryon Ehrhart, chief executive officer of Aon Benfield’s Analytics division, said in a statement.

Aon Benfield said nearly 90 percent of homeowners in California do not have earthquake insurance. In contrast, nearly all mortgaged homes in the state of Florida and along the East Coast of the United States, which is regularly battered by windstorms, are insured against hurricane damage.

The report said U.S. earthquake risk, concentrated largely in California, could overtake U.S. hurricane risk as the world’s most insured natural catastrophe risk as Fannie Mae FNM.N FNM.P and Freddie Mac FRE.N FRE.P gradually reduce their mortgage portfolios.

The mortgage giants, which were put under federal conservatorship by the U.S. government in September, are due to reduce their activities by about 10 percent each year in the decade after 2009.

“The peak reversal that may occur assumes that the successor mortgage market will not continue to allow collateral that is unprotected for the significant risk of earthquake,” it said.

The 1994 earthquake in Northridge, California, cost the mortgage industry up to $400 million, Aon Benfield said, as homeowners unable to meet foreclosure expenses, property repair and other costs defaulted on their loans. Default rates in the area returned to pre-quake levels only in the late 1990s.

Southern California, where foreclosure rates in some areas are among the highest in the United States, held a major earthquake drill on Nov. 13.

Aon Benfield predicted a rising insurance bill for Californians as earthquake coverage becomes mandatory, but said costs were likely to stabilise for homeowners in Florida as U.S. natural catastrophe risks become diversifiable.

The government in September seized control of Fannie Mae and Freddie Mac, which together owned or guaranteed about half of the United States’ $12 trillion in mortgages, after rising mortgage delinquencies triggered losses and reduced their capital bases.


Aon Benfield described 2008 as “unremarkable” in terms of insured natural catastrophe losses, although insurers and reinsurers had suffered capital stresses as a result of turmoil in financial markets.

The largest insured loss event in 2008 was Hurricane Ike, likely to be the third most costly hurricane on record, which caused havoc along the U.S. Gulf Coast in September.

The most significant natural catastrophe was May 12’s earthquake in China, for which rebuilding costs were estimated at $146 billion. “Had there been more mature levels of insurance in China, this earthquake would have easily become the ... most costly insured event in history,” Aon Benfield said.

The Climate and Catastrophe Report also noted a rise in the average frequency intensity of hurricanes in the Atlantic Basin, with an average eight hurricanes per year between 1995 and 2008, above a 59-year average of 6.2 hurricanes per year. (Editing by Mike Nesbit)

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