February 19, 2015

Tenglong Zhao

tenglong.zhaoMajor and Classification

Buisiness Administration

Faculty Mentor

  • A. Cyrus Arman, Ph.D. Candidate in Physics

Department

  • Physics

McNair Project

Exploring the Positive Effects of Tax and Subsidy on California Homeowners’ Earthquake Insurance Purchase

Abstract
“When it comes to earthquakes, the question for many Californians is not if they will hit, but when and how hard.” – Bill Lockyer, California State Treasurer

Looming concerns over the seismic risks present in California beg for one question, how prepared are Californians hedging against the imminent disaster? Purchasing adequate earthquake insurance remains one of the best ways for homeowners to be prepared for the next “Big One”. However, because people do not think probabilistically on their purchase decision (Huber et al., 1997) California homeowners are vastly under purchased on earthquake insurance; according to CEA (California Earthquake Authority), only about 12 percents of California homeowners have earthquake insurance, down from 30 percents in 1996. Uninsured earthquake damages will not only place extreme financial stress on individuals, but also remain a major challenge for the state’s budget planning. Love them or hate them, taxes and subsidies have always been tools for the government to effectively influence consumers’ behaviors. It is then arguable that California state government may achieve the goal of increasing its homeowners’ earthquake insurance purchases by imposing mandatory earthquake taxes along with incentives for earthquake insurance purchases (e.g. a tax credit subsidy). By conducting a survey gear towards California homeowners on the issues raised above, this study brings new insight into homeowners’ attitudes toward taxes and subsidy, in which are directly related to their purchasing decisions of earthquake insurance. This study has an important implication in the sense that it actively seeks solutions to ameliorate the state’s earthquake preparedness.