Banning Major Earthquakes-A Savvy, Market-Saving Move

Apparently, we’ve licked that quake insurance problem. Faced with the devastation (property and market) wrought by the Northridge Earthquake and the realization by insurers that the loss models they had carefully constructed were feats of clay, there was only one thing to do to solve the potential crises created by major earthquakes.

We banned ’em—in the United States, anyway.

(Washington State will be fined and suspended for violating the ban by allowing the Feb. 28 temblor that registered 6.8.)

There was no other way to prevent the demise of the traditional residential earthquake insurance market, which could be just one more Northridge away from becoming a specialty line for only the best risks or for the Lloyd’s of the world. Except, possibly, in California, which, of course, invented the earthquake—and the mini-policy.

Unlike other rumble-prone states, California has its much-maligned attempt at market engineering known as the California Earthquake Authority. To date, the CEA, born Dec. 2, 1996, has done nothing wrong—except to have the temerity to exist.

The CEA saved (most of) the residential earthquake insurance market in California, such as it is, but it will forever be known as the bastard stepchild of a disgraced politician, old Whatever-His-Name-Was. The CEA’s critics have ignored or chosen to disbelieve studies showing that the Authority’s financial strength is equal to or better than that of most insurers writing quake business in the state, which is either an affirmation of the CEA or an indictment of the insurance industry.

Further, because of the CEA’s reliance on the mini-policy, it is supposed to be able to withstand Northridge Times Two. But as the CEA nears its fifth birthday, we still haven’t a clue of its capabilities, or lack thereof, and how effective the claim-handling process will be. We also don’t know how well the mini-policy—which the vast majority of California quake insureds have, regardless of whether they are placed in the CEA or not—would mitigate insurer losses or how disgruntled the holders of said policies would be. (Bet on really, really disgruntled.)

Ironically, there wouldn’t be a CEA, a mini-policy, or even a residential quake insurance market in California had insurers not made a deal with the devil a few years back. In a now-notorious legislative compromise, carriers actually agreed to accept the mandatory offer of quake coverage with each homeowners policy sold in exchange for language dealing with the problem of “concurrent causation.” At that point, though, it represented the mandatory offer of a type of insurance that had been the most profitable line on the planet.

In the years prior to Northridge, property insurers were practically giving away quake coverage in Washington and Oregon—states that while supposedly active seismically hadn’t seen anything of earthshaking significance since the mid-1960s. Carriers were begging their agents to push quake insurance; many companies offered deductibles of—are you sitting down?—2 percent.

Perhaps such hubris angered Mother Nature, who soon decided that “seismically active” should go from threat to reality on the West Coast. It was Oregon, not California, where the first significant activity of the 1990s took place—a 1993 temblor that, among other havoc wreaked, cracked the capitol building in Salem. Ironically, Oregon remains the only West Coast state in which the quake market is somewhat pre-Northridge normal.

Washington, which seems hell-bent on replacing California as ground zero, has a quake market characterized by strict underwriting, insurer reluctance and, recently, the market entrance of St. Paul subsidiary Geo Vera—a sure sign there’s cherries to be picked in the state.

In California, where the ban continues, knuckles remain white at the CEA and any other insurer with a significant earthquake exposure in the state. If Northridge proved anything, besides affirming the creativity of some lawyers, it’s that the residential earthquake insurance market really doesn’t function if there are major temblors. (Dirty little secret: most carriers are selling the coverage in California only because they have to.)

Imagine the political carnage if a big one hits and a few hundred thousand holders of the mini-policy suddenly discover (because they didn’t read their insurance contracts or heed warnings about self-insurance) that they paid multi-hundreds of dollars a year for something that covered only about 50 percent of their quake losses.

California lawmakers would immediately pass legislation eliminating the CEA and making residential property insurance a state-sold commodity, as well as order Chuck Quackenbush tried for crimes against humanity—and that’s if they were in a good mood.

Richard Rambeck, the former editor of InsuranceWeek, has written about insurance issues for nearly a dozen years. He can be reached via e-mail at rambo3@ix.netcom.com.

Topics California Catastrophe Natural Disasters Carriers Washington Market Oregon Earthquake