California is at the greatest risk of a catastrophic earthquake, but most of the West Coast and much of the Midwest are at similar risk. Are your clients prepared?
Rattled by last month’s devastating earthquakes in Mexico and dire warnings of the state’s potential for a major seismic event, California residents have rushed to buy earthquake insurance policies. As a result, the California Earthquake Authority, a nonprofit organization that provides earthquake insurance through partnerships with several major insurers, has sold more than 18,800 policies in the first six months of this year. In the second quarter alone, it posted a 5.4% increase in sales over the same quarter of last year.
Last year, the state registered a net gain of 52,000 in-force policies, seven times the 10-year average annual increase of 7,200. Today, the CEA is responsible for over 950,000 policies. In an interview with Insurance Journal, the CEA’s CEO Glenn Pomeroy attributed much of the surge in sales to Californians taking the threat of earthquakes more seriously. “More and more people [are] paying attention to what scientists are saying,” Pomeroy said.
The number of homes in the Golden State covered by both earthquake and homeowners insurance has steadily risen in recent years. As of 2016, 10.79% of California homeowners owned earthquake and homeowners policies, a slight rise from 10.23% in 2015, 10.17% in 2014, and 10.07% in 2013.
Not Just in California
Unsurprisingly, an awareness of California’s long history of earthquakes has spurred much of the recent demand for earthquake insurance. An April study from the Federal Emergency Management Agency put the national annualized earthquake loss (AEL) projection at $6.1 billion, with California, Oregon, and Washington accounting for 73% of the total. FEMA further assigned 61% of its estimate to California alone, a figure the agency claimed is “consistent with the state's population and building inventory exposed to significant earthquake hazard.” While FEMA calculated the AEL by estimating the lost value of buildings damaged, it did not account for long-term economic losses or damage to public infrastructure.
The West Coast isn’t the only region of the country prone to seismic activity, however. In a recent blog post, USAA Property and Casualty Product Management Director Sunde Schirmers points out that Oklahoma registered more earthquakes than California in 2015. “If you're along the Pacific Coast — from California to Washington — you have earthquake exposure,” he writes. “But there is also a major fault in the Midwest that affects Missouri, Arkansas, Illinois, Kentucky, and Tennessee.”
What Earthquake Insurance Costs
As the recent spike in earthquake insurance sales in California indicates, more homeowners have heeded scientists’ warnings and purchased appropriate coverage, which is sold as a standalone policy or an add-on to an existing homeowner or renters policy. Policies typically reimburse for building repairs, loss of personal belongings, and living expenses if the homeowner has to rent a hotel room while their dwelling is rebuilt. The cost of a premium depends on a structure’s proximity to a fault line or any local history of seismic activity, as well as a building’s age and the estimated replacement cost.
Rates are more expensive in states with a history of frequent earthquakes. Schirmers notes that residents of California, Oregon, Washington, and Alaska pay an average premium of $800, while the national average ranges between $100 and $300 per year. In California, residents can buy CEA policies with a personal property compensation maximum of $200,000 and “loss of use,” or living expense, coverage up to $100,000, and deductibles of 5% to 25%.
In light of the recent spate of natural disasters, insurance agents might want to discuss earthquake insurance with their homeowner clients, especially if they live on the West Coast. A recent study from the Consortium of Universities for Research in Earthquake Engineering estimated that damage caused by a 6.0 magnitude earthquake can reduce a home’s value by 30%. Your clients residing in earthquake-prone areas may want to follow the example of California homeowners and purchase coverage before the next tremor hits.