Mo. Earthquake Insurance Task Force to Review Market Changes

Although Midwesterners worry most about tornadoes, snow and ice storms, lurking in the back of every homeowner’s mind is the knowledge that we, like our California brethren, lie just above a major earthquake fault line — New Madrid. Although no major quake has hit since the 1800s — small tremors and shocks every few years remind Midwestern residents of the danger that lies below the earth’s surface.

Some states take the threat seriously.

In November 2007, Missouri Governor Matt Blunt announced the creation of the Missouri Earthquake Insurance Task Force. In making his announcement, Governor Blunt said that Missourians have experienced the effects of ice storms, flooding and tornadoes over the years, but that it is almost impossible to comprehend the devastating effects an earthquake could have on the private and public infrastructure of this state.

The governor said he has asked the Missouri Earthquake Insurance Task Force to take a closer look at earthquake insurance throughout the state including its availability and affordability, especially near the New Madrid fault.

“Insurance helps secure Missouri homeowners’ and business owners’ financial futures, so we must be proactive to review insurance accessibility and its effect on our state’s economic growth,” Blunt said.

The Task Force is expected to provide a preliminary report on its findings in February and present a full report, with recommendations in Fall 2008.

Availability and Affordability

When Insurance Journal spoke with Missouri Insurance Director Doug Ommen about the Task Force he reiterated that the governor merely wishes to look at some significant changes in the market.

“The cost of earthquake insurance has gone up and some companies have pulled out of the market,” Ommen said. “We want to know why.”

Allstate has stopped selling the product altogether in some Midwestern states although consumers can purchase earthquake insurance from the Northbrook, Ill.-based insurer through a third party.

In addition, Columbus-based Nationwide Insurance recently raised the deductible from 2 percent to 5 percent of a home’s insured value on earthquake insurance sold in Ohio. Nationwide is among the country’s top ten biggest homeowners’ insurance companies and second-biggest in Ohio.

Some companies have raised rates and others have just stopped selling earthquake insurance. Those companies still selling it have in some cases raised rates in the Midwest. Without a major event it is unclear why rates are rising.

“The cost of earthquake insurance is certainly one factor in why some people have dropped their coverage, location is another,” Ommen said. He said that homeowners in the St. Louis area are likely to buy the product because homes are right on the fault line, while others in less dangerous locations may opt to save some money by not buying the coverage.

Another factor affecting the market is that many people that have grown up in Missouri and other states along New Madrid Fault have a false sense of security, some experts say.

Geologists’ Perspective

An overview of the New Madrid Fault shows that it cuts across five state lines and goes across the Mississippi River in three places. The fault system extends 120 miles southward from the area of Charleston, Mo., and Cairo, Ill., through New Madrid and Caruthersville, following Interstate 55 to Blytheville and on down to Marked Tree, Ark.

Geologists say the fault is active, averaging more than 200 measure events per year or (1.0 or more on the Richter scale), about 20 per month. Tremors large enough to be felt (2.5 – 3.0 on the Richter scale) are noted annually. Every 18 months the fault releases a shock of 4.0 or more, capable of local minor damage. The most recent, registering 4.3 along the New Madrid Fault on Thanksgiving evening, 1996, was felt by citizens in the states of Missouri, Arkansas, Tennessee, Kentucky, Illinois and Mississippi. Magnitudes of 5.0 or greater occur about once per decade, can do significant damage, and are often felt in several states.

Academics from area universities are often at odds about whether the New Madrid Fault poses a serious threat. Joe Gillman, a Missouri state geologist, said that the difference between the fault lines in California and ones in the Midwest is that bedrock is underneath the Midwestern land.

“If a major quake hits in the Midwest it will affect a significantly wider geographic area than on the coast,” Gillman said. “We have different Tetonic settings than those in California and it would make a difference.”

When asked if homeowners along the New Madrid Fault were in imminent danger, Gillman declined to comment, but admitted that the state of Missouri employs 30 geologists to keep tabs on things in the state.

Evidently the Missouri Legislature believes the threat of a major quake is serious and that one will eventually hit the area because it is considering a proposal that would create a catastrophic fund. SB 877 would establish the Missouri Catastrophe Fund to help pay covered residential property damage insurance claims in the aftermath of an earthquake that affects Missouri homeowners and their property/casualty insurers.

The fund, which will consist of premiums paid by insurers, bond revenues, and appropriated state funds, will provide a backstop for insurance companies to insure against covered catastrophic losses to avoid the collapse of the property insurance market in the wake of a major earthquake.

It is likely that Missouri Earthquake Insurance Task Force’s preliminary report in February will have some impact on how the legislature proceeds on SB 877, but it is less certain whether its report will influence homeowners in the state to purchase the earthquake coverage many are saying they really should.