I’m a limited partner with a small ownership share in a fairly large apartment complex. The general partner, who has become a friend, is a very bright guy, but he sometimes runs ideas by me to get my take.

Two days ago, he left a voicemail asking me if we should renew our earthquake insurance. He said that it was priced at about $20,000. (I estimate that the property is worth close to $40 million.) He said he was concerned about other limited partners being upset that we had bought earthquake insurance for the last 20 or so years and we never got a return.

So I called him back immediately and said, “I bought life insurance for 30 years and I’m really pissed off that I didn’t die.”

He laughed and got the point immediately. He renewed our earthquake insurance.

I wrote about something similar in David R. Henderson, “Behave!Regulation, Summer 2013, my review of Insurance and Behavioral Economics by Wharton School economics professors Howard Kunreuther and Mark Pauly and Urban Institute research associate Stacey McMorrow  Here’s the passage:

The authors note, though, some systematic anomalies in buyers’ purchase of disaster insurance. Shortly after a disaster, they report, the demand for disaster insurance increases. They give the example of Californians after the 1989 Loma Prieta earthquake. Before the earthquake, 22.4 percent of homeowners in the affected counties had earthquake coverage. Four years later, 36.6 percent had coverage. According to the authors, seismologists say that the probability of another severe quake actually falls after a big earthquake because the stress on the fault has been relieved. So if buyers are informed and rational, the percentage of homeowners with earthquake coverage after the 1989 quake should have been lower, not higher.

Related to this anomaly is the fact that many buyers of flood insurance cancel their insurance after they have gone a few years without a flood. The authors suggest two possible reasons: (1) the longer homeowners go without experiencing a flood, the lower they estimate the probability of a flood, or (2) they think (like my friend’s mother‐​in‐​law) that the money they spent on flood insurance during dry years was wasted.

Note that the fact that we haven’t had a big earthquake in California for decades means that we should be more inclined, rather than less inclined, to buy earthquake insurance now.

The pic above is of the aftermath of the San Francisco earthquake of 1906.