20 Years after the Northridge earthquake – Did We Learn?

It has been 20 years since the Northridge earthquake hit the Los Angeles area resulting in several deaths, thousands of injuries, huge business losses and massively disrupted transportation systems. The total cost of insured damages was over $15 billion – that’s about $24 billion in today’s money. It was, and remains today, the 4^th costliest disaster in U.S. history. It’s easy to think that 2 decades after such a calamity and many smaller quakes later, things will have changed, at least as far as earthquake insurance goes. The truth is that it hasn’t.

Quake Insurance – Who Wants It?

There has been about a 33% increase in the number of earthquake policies in force in California as compared to 1994. That may sound impressive, but the fact is that only 10.6% of homeowners in the state have earthquake insurance. There are 3 reasons for this. This first is the fact that 20 years on, the memories of the destruction have faded. Secondly, quake insurance is thought to be too expensive. And thirdly, most people think that if such a disaster should happen again, the government will step in to bail them out.

There is nothing that can be done about the shortness of people’s memory. But the other 2 factors need to be considered carefully. As for the government stepping in, disaster relief is limited to providing help in coping with the effects of the quake, not in rebuilding and recovery.

As regard to the high cost of quake insurance, the root of the problem is in the low cost of coverage before 1994. Till that time quake insurance was not a separate policy as it is today. It was simply an endorsement on a homeowner’s policy that was easy to get and cost very little. The fact that the insurance was under-priced is proven by the fact that the losses incurred by the insurance companies because of Northridge to use up all the premium collected by the insurers for the last 30 years.

Some companies almost went under and since California law requires that those who offer homeowners’ insurance also offer quake coverage, many insurers quit the market. After Northridge, almost 1 million policies were dropped.

The Earthquake Insurance Affordability Act

That situation led to the creation of the California Earthquake Authority (CEA) which today has $10 billion in claims paying capacity. 45% of this is in capital while the balance is in the form of reinsurance and catastrophe bonds. While this has helped make the quake insurance more widely available, the cost is still a limiting factor.

Among the many steps being taken to make earthquake insurance more affordable is the Earthquake Insurance Affordability Act which is before the Congress. This bill will enable the CEA to save $100 million in reinsurance costs per year by providing a federal guarantee of private market debt. This in turn would result in a reduction of premiums by about 20%.

Another step being taken is the reduction in deductibles which today typically stands at 15%. CEA now has a range of polices that allow policy holders a mix and match option where they can increase of decrease contents coverage etc. so as to bring the deductibles down to around 10%.

The aim of these and other measures is to bring the 89% of uncovered homeowners in the ambit of earthquake insurance. The sooner this happens, the better. According to the president of the Insurance Information Institute, “the potential cost of U.S. earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may or may not have been built or upgraded to current building codes.”

However, while CEA coverage is offered by 70% of the companies, Allied Brokers has companies that offer better coverage at a lower cost. We cover personal property, loss of use and separate structures just like a homeowners policy.

Plus our companies are much more financially sound. CEA is an assigned risk pool just like Obamacare; they take everyone with no accounting for risk. This means their losses in a big quake will be bigger. Our companies will not accept high risk homes.

Also when the CEA goes broke, and it will, there is no recourse to collect. Our companies are backed by a state bailout fund and all of the assets of the company and its reinsurers.

Contact Insurance by Allied Brokers at (650) 328-1000 to know more about earthquake insurance or about any questions related to your insurance policies.