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The Earthquake Coverage Disconnect

Pat Speer
Insurance Experts' Forum, September 5, 2014

It doesn’t take a rocket scientist to understand the catastrophic potential of earthquakes. With no real warning, large (magnitude 6.0 or larger) earthquakes are known to cause fatalities and extreme property damage. We also know that compared to other catastrophic risks, earthquakes occur infrequently and erratically, but that doesn’t make them any less of a concern for insurers and the policyholders they are paid to protect.

Unlike the federal backing afforded insurers with flood insurance, there is no such support for earthquakes, so the property and casualty insurance industry has taken it on the chin at times, resulting in an ebb and flow of premium increases (typically in reaction to the last largest quake). Federally backed mortgage lenders also face increased risks, as earthquake coverage is not mandatory even in fault zones.

Yet in today’s market, the stakes have never been higher.  The most recent U.S. Geological Survey maps reveal that 42 states are at risk, with 16 states at high risk. 

The Insurance Information Institute (I.I.I.) reports that if an earthquake the size and magnitude of the 1906 San Francisco earthquake (about a 7.8) would hit today, it would cause some $93 billion in insured losses.  Economic losses would total three to four times that figure.

Yet many consumers remain unaware of their homeowners’ or earthquake policy limits.  “Standard homeowners, renters and business insurance policies do not cover damage from earthquakes,” says Jeanne Salvatore, senior vice president and chief communications officer at the I.I.I. “Coverage is only available in the form of an endorsement or as a separate policy.”

Meanwhile, some consumers, such as those affected by the recent Napa Valley, California quake, are under the impression that disaster relief and private donations will help them repair and rebuild their quake damaged properties.

All this creates a Catch 22: Greater risks and fewer policies sold leads to policy premium increases and higher deductibles. But this makes the coverage less attractive to customers and results in even fewer policy purchases. A 2014 I.I.I. survey reveals that only 7 percent of homeowners nationwide report purchasing an earthquake policy or rider, down from 10 percent last year. In the West, where earthquake activity and related risk is greater, only 10 percent have earthquake coverage, down from 22 percent in 2013. 

While the industry works to beef up its risk modelling data, organizations such as the California Earthquake Authority are making inroads to improving customer awareness and understanding about the nuances of homeowners’ versus earthquake policy limits.

The real solution, however, may involve falling back on a key insurance principle: enforcing a proactive approach to risk in order to affect improved earthquake loss mitigation. When applied to catastrophic property risk, building stronger, safer buildings, or reinforcing those buildings most at risk has already proven to save lives and reduce loss, thereby obviating the need for federal disaster relief.

To this end, support for the creation of a separate, federal financial incentive for states that adopt and enforce statewide building codes, such as is promulgated by the National Association of Mutual Insurance Companies - NAMIC and the BuildStrong Coalition may present a state-by-state challenge, but well worth the effort.

What else can the industry do?

Comments (1)

premiums and deductibles need to be realistic, and the claims process must be fair to all - and enforced with an iron fist.

we had coverage for the '95 northridge quake and had to threaten legal action before our policy was finally honored - at first - then we spend months nitpicking with adjusters whose annual bonuses seemed to be tied with how much they screwed us.

the nitpicking was an endless and weekly ordeal that never stopped - from the brand of water heater, the 'like' quality of carpet and windows, to arguing with city inspectors over code requirements, to the hotel we were forced to live in while our home was being repaired.

our coverage was for 'like' replacement with building code upgrades, and our home was completely updated/remodeled roughly five years prior to the earthquake, so we were only interested in putting our home back to where it was, not upgrade on anyone else's dime.

several years ago we elected to forgo coverage because, based on our experience, the deductible is sooooooo high we can make repairs ourselves and be under the deductible limit. unless the home is a total loss, then we will walk away.

until deductibles, coverage, and premiums are meaningful to the consuming public in terms of concrete answers to 'what if' questions the lack of interest will persist.

one solution would be to sell a specific benefit amount - perhaps with limits of 50k or 100k - with a small deductible. that way each carrier could know their exposure and their underwriters would be able to price the products accordingly - much like life insurance...

if the calif earthquake authority was truly interested in promoting coverage for all they would force each participating company - themselves included - to sell only policies that could be easily understood by the average 4th grader and which specifically spelled out the 'what ifs'.

and, making the corporate officers of insurance companies personally/legally responsible for the bad faith and shenanigans of their employees and hired outside agents during the claims process would make a big difference. problem is that the insurance companies make large campaign contributions to those who either legislate them or regulate them, nothing will ever change, and earthquake coverage will be nothing more than a carnival shell game.

sorry to ramble, but i am in the industry, have had the coverage and made the conscious decision to drop it, and have had to make an earthquake claim in the past.

Posted by: hal r | September 5, 2014 3:06 PM

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