The Evolution of Earthquake Insurance

According to the U.S. Geological Survey, there is a 70 percent probability that an earthquake of magnitude 6.7 or larger will strike the San Francisco Bay Area during the next 30 years. However, while Californians live with earthquakes, roughly 12 percent of California homeowners purchase earthquake insurance.

Nonetheless, Californians buy the most earthquake insurance in the nation. According to National Association of Insurance Commissioners, quake insurance premiums in California totaled more than $966 million in 2008. That was more than six times the earthquake insurance business done in any other state, and more than half the national total of $1.82 billion.

Insurers in California are required by state law to offer earthquake insurance to their homeowner insurance customers. These policyholders can decide not to purchase earthquake coverage or to purchase it from another source.

Prior to 1994, approximately 28 percent of Californians carried earthquake insurance. Traditional policies carried a 10 percent deductible and provided unlimited coverage for contents and additional living expenses. The policies were offered by the homeowner insurer, and sold as an endorsement to the homeowner insurance policy.

On January 17, 1994, the Northridge earthquake shook Southern California. The magnitude 6.7 quake caused an estimated $15 billion dollars in insured damage – more than anyone expected from an earthquake of that size. The insurance industry sustained dramatic losses, paying out more in Northridge claims than it had collected in earthquake insurance premium in the preceding 30 years. While no licensed insurer went insolvent due to the catastrophe, some came very close.

In order to recover surplus, and to protect against another earthquake, insurers began limiting their earthquake exposure by reducing their volume of new homeowner policies. In addition, most insurers filed for rate increases, coupled with increases in the deductible from 10 percent to 15 percent or higher.

In 1995, the state Legislature passed Assembly Bill 1366, which authorized insurers to offer a “mini” earthquake policy with substantially reduced policy limits to comply with the mandatory offer of earthquake insurance. In essence, the traditional earthquake insurance policy became a catastrophe policy designed to get homeowners with severe earthquake damage back into a safe home.

The mini policy was the first step toward the establishment of the California Earthquake Authority. The CEA was established in 1996 to make basic earthquake coverage available at an affordable price. It is now the world’s largest provider of earthquake insurance.

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