Earthquake Awareness: Not Just a California Thing Anymore

Residents in Oregon and Washington would probably be surprised to know that more than 1,000 earthquakes per year are recorded in the two states by the seismology lab at the University of Washington. The biggest reason for that surprise would be that only one to two dozen of those quakes rattle the ground enough to be felt by residents.

To the south, in the most famous earthquake state in the country, Californians hear about and feel many quakes each year as if it is no big deal—unless it comes in the form of the 1994 Northridge killer quake, which claimed 72 lives and amounted to staggering totals in financial losses. The state literally shakes 365 days a year, often going unnoticed by anyone but the experts who study even the smallest of movements.

With all this rattling and rolling, one would think earthquake insurance would be a hot commodity in the three states. But agents selling quake policies up and down the West Coast still face a challenge.

Geo Vera shifts into Washington
Just recently, California-based Geo Vera, a member of The St. Paul Companies, began selling earthquake insurance in Washington.

Geo Vera Vice President of Marketing Tim Behrendt spoke about the company’s decision to expand from its California business. “We saw a need after the Seattle quake, based on some of the reaction of the carriers—we thought it would present us with an opportunity to write some residential earthquake business in that state,” Behrendt said. “We already have signed up over 100 agents in Washington and we’ve received more applications every week for new appointments from the area—it has been really positive.

“We have our two products—the comprehensive (full earthquake coverage offered in a combined single limit with a deductible of 10 percent and a higher deductible for premium credit), and a standard program which is basically modeled after the California mini-policy, which is coverage for the dwelling, with minimal coverages for contents and additional living expense.”

In California, Behrendt noted that the earthquake market is still good for Geo Vera, even seven years after the Northridge quake.

“We’re still selling a lot of residential earthquake insurance statewide,” Behrendt said. “It’s strange with earthquake insurance—the further away you move (from a major quake), the closer you’re moving to the next event. In a lot of ways, you don’t grow as fast as the first couple of years after an earthquake where you experience a lot of growth. I don’t see many companies in my perspective getting interested in writing earthquake all of sudden.”

How hard a sell is quake coverage?
Behrendt notes consumers who desire the coverage will keep it year after year because they know eventually there’s going to be an earthquake. “From an agent’s perspective, as you move away from an earthquake, it isn’t foremost on people’s minds, so it probably does become more difficult to explain to them the importance of having that coverage.”

Behrendt said there are just over 110,000 policyholders between the two companies—Geo Vera and Pacific Select, which was acquired by Geo Vera in 2000.

As for now, Behrendt said the company doesn’t have plans to offer earthquake insurance in Oregon. “That could change if there were an event, but for now, we don’t plan on going in there,” he noted.

Rumbling in the Northwest
While they may not feel most quakes that hit the state, Oregonians do get their share of shakers during the year.

According to John Beaulieu, chief state geologist, “We’re not in a panic mode up here, more of an alerting and management mode. If we can manage the weather up here, we can handle earthquakes,” he added with a laugh.

“Previous to 1990, Oregon was all zoned ‘2B,’ which is a moderate to moderately low hazard,” Beaulieu continued. “During some zone changes in the 1990s, we now have a strip along the southwest coast which is a Zone 4 (high risk), the Western Oregon area west of the crest of the Cascades is 3, Klamath County is 3, Eastern Oregon is 2B, so we’ve had an upgrade.

“What we’ve done in the last 15 to 20 years is we’ve seen more detailed mapping which shows us patterns around the state that indicate active faulting. We’ve modeled what the losses would be for a 500-year time frame, and as a result, all of the losses in Oregon due to earthquakes will total something in the tens of billions of dollars—still low compared to California.” Oregon ranks third in the nation for projected losses, with Washington and California ranking higher in earthquake losses, according to Beaulieu.

The last major earthquakes in the state were a 6 and a 5.9 magnitude in Klamath Falls in 1993 (the state’s largest since 1936), which resulted in a pair of deaths and some $7 million in damages; and a 5.6 magnitude in Scotts Mills just outside of Salem.

“The general sense of what I see on TV and talkshows [is that] the level of earthquake insurance purchased in Oregon is equivalent to that purchased in California. People in Oregon are kind of alert and so they’re out there buying it, so it is relatively cheap—whereas in California, depending on what your ZIP code is and how close you are to an active fault, the rates are so high people decide not to buy it.”

Most earthquake coverage includes a standard deductible of five or 10 percent, and the deductible also applies separately to contents in the home. Most Oregonians do not have protection against earthquake damage, according to information released by the Oregon Insurance Division.

To the north, Karl Newman, executive director of the Washington Insurance Council (WIC), noted, “This area has come under a lot more geologic scrutiny over the last 10 years. In the last five to eight years, geologists at the UW [University of Washington] seismology lab discovered a lot more faults. It turns out the city of Seattle, according to some studies, may be the worst place in Washington to build a city.”

Newman adds that the WIC just released information to encourage residents in the vicinity of February’s Nisqually quake to take their good intentions and retrofit their homes.

“Leading up to the Nisqually quake, what we ended up having is evidence that there is a whole lot more likelihood of having a large quake,” Newman said. “Once that information came out, reinsurers in the area…said ‘you guys are overexposed,’ and there was some real strong pressure for companies doing earthquake business in Washington to shift their methodology. Put in the position where they increase deductibles, they change coverages. Some companies came out with a separate policy and they made some pretty major changes. When the Nisqually quake came along, a lot of the changes that may have been caused by a quake of that magnitude had already taken place.”

Newman described the Nisqually quake as a great educational opportunity for insureds to see what is covered and what isn’t, and for companies offering earthquake coverage to try and tailor it to meet the needs of residents.

“It takes a triggering event like this to get people’s attention,” he said. “Earthquake insurance could double your homeowners insurance, but it is still less for someone than their auto insurance in most cases. If your home is $350 a year to insure, it may be $700 to insure a home for earthquake coverage—still about a buck a day for you to insure your assets. That’s a typical selling point for agents to say ‘hey, it’s less than a pack of cigarettes a day.'”

Newman adds that one issue for agents selling earthquake insurance is that you can’t predict it. “There’s no statistical validity to the process. You can look at auto rates, homeowner rates, rates of fire—that’s all predictable.”

Newman has seen a shift of earthquake awareness for all involved in the process in Washington.

“In the last five to eight years, the awareness as people became aware of a big earthquake happening has led to a change in codes [in buildings] around the state,” Newman said. “As more data comes in, companies will continue to offer the coverage, but will also be looking for ways to make it affordable while making it adequate.

“It’s one of the only types of insurance that can wipe out a company. You just can’t really reinsure for it, predict the loss adequately, because it is such an unknown.”

The California precedent
In the Golden State, Californians have the option of buying earthquake insurance with the California Earthquake Authority (CEA), which is a state-run insurance option for residents, servicing more than 800,000 policies. The CEA was formed following the Northridge quake with the main intention of being able to handle losses from earthquakes. According to a Personal Insurance Federation of California report, the $15.3-billion loss from the Northridge catastrophe equaled approximately four times more than the $3.95-billion earthquake insurance premiums gathered across the state for the prior 25 years.

Milo Pearson, chief operating officer for the CEA, noted that the market for the CEA has been fairly stable in recent times. “Basically in 1997, it peaked at roughly 950,000 policies. Since then, the CEA has been losing some policies, some of which is normal attrition. We’ve changed our rates a couple of times during that period of time—mostly we’ve lowered them.

“Particularly for earthquake insurance, if you lower your rates it doesn’t necessarily equate to the fact…that people will rush out and buy the product. Conversely, if you increase your rates and you’ve got folks sitting on the fence about whether they want to continue their earthquake coverage or not, that increase may be enough of a nudge for them to not keep their policies.”

According to Pearson, the majority of policies the company writes are in the greater L.A. area and Bay area. “If you combine those two areas, that’s probably representing 60 percent of what we write on a statewide basis,” Pearson said.

Stan Devereux, legislative and public affairs director for the CEA, added that the CEA’s current earthquake market share now is at 65.98 percent. “We’re at as close as you can get to the two-thirds of the market share. We did increase slightly by .23 percent for 2000,” Devereux commented.

“That equates to roughly $421 million in written premiums and 875,000 policies,” Pearson added.

Taking the challenge
What are the toughest factors facing an agent selling earthquake policies in California?

“Depending upon where you live, it might be price, but I think in general on a statewide basis, I don’t view the challenge to be price, I view it to be coverage,” Pearson said. “Prior to Northridge, a traditional earthquake policy provided lots of different coverages that the new mini-policies do not provide…[Now] basically what they’re buying is half of what they use to have.”

According to John McGarry, owner of J-Mac Insurance in Tarzana, the California earthquake insurance business has seen its highs and lows.

“What we’re watching is that the farther we get away from the earthquake we had, the fewer people are purchasing the product,” McGarry said. “Yeah, Northridge-unless you lost your shirt and you were at the epicenter of it, the concern isn’t the same as someone who lives there.”

According to McGarry, who has been involved in the quake market for some 35 years, San Francisco, San Jose and Los Angeles are the main areas where people are purchasing earthquake insurance.

McGarry noted that of the new homeowners policies his company writes, 35 percent have earthquake insurance on them. The biggest change over the years he noted was, “when I first was selling it, the premiums were low and the coverages were massive. It was actually an easier product to sell.”

Some typical inquiries that McGarry gets from homeowners include, “I know my dwelling will be covered, but what about the rest of my property?” “What will happen with the garage, my personal property?”
“Does the policy pay if I have to go somewhere while they redo the house?” “What happens if we have to remove the house and start all over again?”

McGarry has one piece of advice for agents when it comes to writing earthquake insurance.

“If you only have one policy in your agency for that client, that client has a much easier time going someplace else. So, if you can write the earthquake and the homeowners, you’re obviously providing a better service to them, because you know more about it,” he pointed out.

While scientists for decades have tried to predict earthquakes, there is no proven method that has been used successfully on a regular basis. The Pacific Northwest has only been looked at for a couple of decades, not long enough to form any set patterns.

However, as WIC’s Newman said, “Now that [the Nisqually quake] has happened here to a much lesser degree [than Northridge] but caused some damage…it will cause people to sit up and take notice and say ‘What if that happened here?”

Topics California Catastrophe Natural Disasters Agencies Washington Homeowners Oregon Earthquake